Bunge Global S.A. (BG) Q1 2012 Earnings Report, Transcript and Summary

Welcome to the First Quarter Bunge Limited Earnings Conference Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Mark Haden. Mr. Haden, you may begin.

Great. Thank you, John. And thank you, everyone, for joining us this morning. Welcome to Bunge Limited's First Quarter 2012 Earnings Conference Call. Before we get started, I want to inform you that we have prepared a slide presentation to accompany our discussion. It can be found in the Investors section of our website at bunge.com, under Investor Presentations. Reconciliations of non-GAAP measures disclosed verbally on this conference call to the most directly comparable GAAP financial measure are posted on our website in the Investors section. I'd like to direct you to Slide 2 and remind you that today's presentation includes forward-looking statements that reflect Bunge's current views 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 continued in -- contained in this presentation, and encourages you to review these factors. Participating on the call this morning are Alberto Weisser, Bunge's Chairman and Chief Executive Officer; and Drew Burke, Bunge's Chief Financial Officer. I'll now turn the call over to Alberto, and he'll begin with Slide 3.

Good morning, everyone. We faced headwinds in the first quarter, as expected, but are confident that we will deliver strong results in 2012. Agribusiness and Food Ingredients performed well. However, in sugar & bioenergy, lower margins for ethanol depressed results. And fertilizer results were impacted by an environment of falling international prices, as well as a non-recurring item. Looking ahead, market conditions in agribusiness are better than they were at the beginning of the year. Supply and demand in oilseeds and grains is more balanced, and export shipments in key crops are up compared to last year, which should support volumes and margins globally. Volatility should persist, but we feel confident that our risk management capabilities will enable Bunge to navigate the market successfully. In sugar & bioenergy, margins should improve significantly with the new harvest, and we are confident we will meet expectations for the remainder of the year. And in fertilizer, we expect margins and volumes to improve with the start of the traditional sale season. But we clearly have more work to do here and continue to evolve our business model to yield better returns. Now I will turn it over to Drew who will discuss our first quarter financial results and outlook.

Thank you, Alberto, and good morning, everyone. Let's turn to Page 4. Our net income for the quarter is $92 million versus $232 million in the prior year. The quarter does contain a notable item of $27 million. This charge relates to a Brazilian court case regarding an environmental incident which occurred in 1998. The charge is included in our fertilizer business. If we adjust our net income for this notable item, our net income for the quarter would be $110 million. Our earnings per share as reported is $0.57 per share, and adjusted for the notable item, it is $0.69 per share. Our agribusiness segment EBIT was $197 million versus a strong comparison of $249 million in the prior year. This result was in line with our outlook as stated during our last call. The major portion of the reduction was in oilseeds processing in the United States and Europe. U.S. margins continued to be impacted by low capacity utilization. Europe continued to be affected by low rapeseed gross margins due to the small crop. Our grains business performed well, but below prior year led by strong results in South America. Agribusiness volumes increased significantly from 24 million metric tons in 2011 to 30 million tons in 2012. This increase reflected growth in our asset base, our new oilseed processing facilities in Asia, our new grain facilities in North America and our new ports in Ukraine and the Pacific Northwest, as well as higher grain merchandising volumes in Europe, which, last year, was impacted by the smaller crops in the Black Sea. Sugar & bioenergy reported a loss of $33 million versus a profit of $2 million in the prior year. The first quarter is the inter-harvest period in Brazil, and our mills are not operating. During this period, we sold product that has been carried over from the previous crop. Due to the low harvest last year, the industry carried in ethanol inventories at a high cost. Prices did not increase to compensate for this as they were pressured by the reduction in the gasoline blend rate from 25% to 20% and the presence of imported ethanol from the U.S. Fertilizer EBIT was a loss of $74 million in the quarter versus a $1 million loss in the prior year. The loss of $74 million includes the $27 million notable item discussed earlier. The majority of the remaining loss of $47 million was due to our Brazilian business and our Moroccan joint venture. The Brazilian loss was mainly due to weak margins, primarily caused by declining international prices. While contribution margins were positive, they were not high enough to cover our industrial and selling, general and administrative cost. Our Moroccan results were also impacted by lower margins and by a plant shutdown for scheduled maintenance. Our foods business EBIT was $48 million versus $67 million in the prior year. Corn milling performed well and was ahead of the prior year. Our edible oils and wheat milling businesses performed below prior year. Both our Brazilian edible oil and wheat milling businesses experienced lower volumes as we lost some sales opportunities due to the implementation of the new SAP system. Additionally, our Brazilian edible oils business had higher advertising and marketing expenses as we invested in the growth of our brands. Our U.S. edible oils business also performed below prior year. Our new food acquisitions are performing well. Let's turn to Page 5 and the balance sheet. Our balance sheet continues to remain strong. During the quarter, our working capital increased $533 million due to a $635 million increase in inventories, reflecting higher commodity prices. Our net debt increased by $774 million -- $747 million, primarily to finance those inventories. Importantly, especially given the current market environment and the opportunities it should present, we have $2.1 billion of committed and unused debt capacity. Let's turn to Page 6 and the cash flow statement. Funds from operation were $196 million, primarily composed of net income plus depreciation and amortization. The $498 million change in operating assets and liabilities is primarily the increase in inventories due to the higher commodity prices mentioned earlier. Our capital expenditures of $224 million are in line with plan. Let's turn to Page 7 and our outlook. Overall, we are feeling very good about 2012. Agribusiness is off to a good start, and the trends are turning more favorable. Food is on pace for another solid year, and the first quarter problems experienced by sugar & bioenergy and fertilizer should be behind us. Let's take a look at each business individually. In agribusiness, global demand for grains, proteins and oils is on track. Crops in South America are coming in below expectations. But in Brazil, it will still be a record corn crop, and there will be enough soy to maintain crushing for export until the beginning of the Northern harvest. Farmer selling has picked up with the increase in prices and the weakening of the real. We expect large North American crops, good export demand and higher utilization rates in our processing and grain operations. In Europe, the rate in wheat crops may be smaller, but they will be compensated by larger sunseed and corn crops. Overall, in the Northern Hemisphere, margins should strengthen. Demand in Asia remains strong, and margins are improving. Based on the crop discussions I just discussed in the Northern Hemisphere, volumes in our grain business should be strong, and we will get the benefit of our new ports in Ukraine, which we acquired last year; and the Pacific Northwest, which began operations during the first quarter. Overall, it is shaping up to be a strong second half in agribusiness. In sugar, the key factor is the size of the sugarcane harvest. We are projecting our sugarcane crush to be 17 million to 18 million tons, reflecting our crop evaluations and the impact of some dry weather in February and March. Over this annual crop cycle, which begins in April and ends in March of 2012, we expect to hit our target of $8 to $10 EBIT per ton. However, for the calendar year, we'll be slightly below this target as we will not be able to fully compensate for the first quarter loss. It is also important to note that current ethanol prices are in line with our expectations, and we will now begin selling new crop production rather than the higher-cost product carried in from the prior year. All of our mills are operating. Please remember that our results will be heavily weighted toward the second half of the year. This happens as the cane harvested early in the harvest period, which is our second quarter, has a lower sugar content than the cane harvested later on. We are continuing our aggressive planting program to match our sugarcane capacity to our industrial capacity. To this end, we are planning to plant more than 70,000 hectares of cane during 2012. Our food & ingredients business is on track for another solid year. Over the last 1.5 years, we have made a number of acquisitions of businesses closely related to our core food businesses. They have been quickly integrated and are producing positive results. In fertilizers, the positive macro trends remain in place. Strong farmer economics and the need for large crops encourage optimizing fertilizer application. This should lead to large volumes and, combined with stabilizing international prices, return sufficient structural margins to the business. This will be primarily seen in the second half of the year when South America enters its peak buying season. We expect fertilizers' full year results to exceed 2011's. Overall, our expectations for 2012 are higher than they were at the start of the year. The increased earnings potential we see in agribusiness and foods will more than offset the first quarter shortfall in sugar & bioenergy and fertilizer. We expect a strong second half for all our businesses. We are now happy to take questions, and John will assist us in doing that.

[Operator Instructions] And our first question comes from Christine McCracken from Cleveland Research.

Drew, maybe you can address this. I was a little surprised at the disruption from SAP in food. And I'm just curious, maybe you can provide any color, is that a significant cost? And maybe give any detail of around where you are in the process of implementing that?

Yes, let me start with the last thing you asked. All of the problems that we incurred are behind us. They have been fixed, and the implementation is up to date. As you know, Brazil has a complicated local tax structure, and getting that exactly right to be able to process all our shipments on a timely basis was difficult for the first weeks that we had the new system up and running. That is behind us somewhat now. It's hard to give you a precise number for the impact of what it was, because I would be assuming how much we would've slowed if we didn't have to settle down. But it could be in the $10 million range.

Okay. So going forward, it could be, conceptually, a net benefit as things -- you actually get the benefits of the SAP system in -- and that [indiscernible] the results?

Yes. We're actually very excited to be bringing our Brazil business onto SAP. Because, as you know, that type of enterprise management system gives you a great chance to increase productivity and make the operations better on an ongoing basis. It's just unfortunate that we had to go through some difficulties in the initial startup. But overall, we think it'll be a great addition to our business.

And then just on fertilizer, you mentioned that you think you can get back to, I guess, better than 2000 levels by year-end. I'm just wondering if you can provide any impact or quantification of the impact of the high-cost inventory there? Where you are generally in inventories as we head into the key selling season? Is that going to -- volumes could be obviously very good as farmer demand has been good. But if you're carrying high-cost inventory, it doesn't seem like you're going to see much margin benefit there.

Obviously, we have worked on our model in fertilizer, and we have had a much better performance already on the risk side. But when you have crops like we had this time in many of the inputs, it is very difficult to manage it. But as we have reduced significantly our inventory cash cycle time, most of it is already through the system. We have a little bit of it in April, but that is why we -- most of it is out. So we feel quite confident for the rest of the year.

Our next question comes from Christina McGlone from Deutsche Bank.

I guess to start on sugar. One thing that I'm a little confused on is the fact that the blend rate was lowered last fall, and a lot of the contracting for U.S. imports was done last summer. So, I guess, why wasn't it anticipated that the ethanol situation would be different this inter-harvest season versus last year? And so why did Bunge carry over so much inventory?

Oh, we have the normal type of inventory. And what -- the only big difference was that at this time of the year, we expect an increase in the ethanol price. And it did not exactly happened and for a couple of weeks, because of the concentration of the ethanol that came from the U.S., there was even a drop over 5, 6 weeks. So kind of concentrating it at the same time. But it is -- more or less, we were expecting this. We were -- did not expect it to have a profit in this quarter, but it was a little bit more relevant.

Christina, I think the one thing I would add to that is we did not make a commercial decision to carry extra inventories in the quarter. We do a lot of our ethanol business under contracts, and what we carried into the quarter was the amount of ethanol we needed to satisfy those contracts.

Okay. And they weren't -- the contracts weren't priced, I guess.

No, they're non-priced. They're quantity-type of contracts that price at market.

And then, I guess, just so we're clear, because I feel like this is a segment we're consistently off, so the harvest starts in April, you have lower sugar content. Are you going to be able to make money in the second quarter in sugar?

Yes. Small, but we will.

Okay. And then now, when we think about the whole year, it's 17 million to 18 million metric tons in volume and then probably more. We're doing our numbers on a calendar basis more like $7 a ton in EBIT?

We don't give precise guidance, but that logic is correct.

Okay. And then, Alberto, can you talk about agribusiness? Because I know you characterize it as strong. But when I look back over the last several quarters and I think of Bunge as different today given the footprint and the additional facilities that you have, to me, it looks weak. The weakest since that kind of snafu you had in the second quarter of '10. So I guess I don't really know how it was strong. And then -- then how would you characterize strong for the rest of the year? What are the things that -- what are the drivers and how are margins, if you can kind of go around the world?

The first quarter for Bunge is always the weakest, and we performed, on this quarter, better than the fourth quarter of 2011. That gives an indication. And so it is normally the end of the Northern Hemisphere's cycle. So crush margins were -- have improved, but they were below the long-term trends. So we've felt that our performance in the first quarter was better than we thought it would happen at the beginning of the year and as we finished the fourth quarter. So that is why we feel it was good. And the reason we feel good about the rest of the year is that it is -- there's better margins in the -- in U.S. It's also in China. There are obviously issues with the rapeseed in Europe. But also, we feel the way the fundamentals are with strong demand and a not excessive large crop in South America will allow good performance in the Northern Hemisphere in the fourth quarter. All of this was a little bit different and less positive during -- in February when we had the fourth quarter call.

I think, Christina, the one reason -- or let me, as a reminder, going into this quarter, we didn't expect a good performance out of the U.S., which is more usually one of our stronger performance or performers in the quarter, as they're at the tail of the crop. But if you remember, the crop was not good last year. So the earnings opportunities weren't there, nor did we expect them to be there. So that's why we do feel it was a solid quarter based on what we did expect to happen. But we never expected it to be a record quarter or a big quarter because market conditions just weren't there.

And just last question, Alberto, given the situation in Argentina with Bunge-specific, the soybean industry and then the nationalization of YPF, I know you're investing in a corn wet mill. Can you talk about -- I mean, does it make sense to invest in incremental dollar in Argentina right now?

I would say that our industry is different, Christina. It is a very competitive industry, has always invested and is investing a lot. It's competitive. And it is a very important contributor to the efficiency of this system. I think it is different.

Our next question comes from Lindsay Drucker Mann from Goldman Sachs.

Just a quick one on sugar. I get that the weather is obviously something that you can't control. I was curious at this stage in the game, as you think back to last year where weather risks also became apparent in the size of your sugarcane output. What's -- how would you frame the risks that we have, the more continued downward revisions to potential crushing output this year as we saw in soybeans across the year with sort of consecutive downward revision? Are we far enough along in terms of the pace of the harvest to have a high degree of confidence that the 17 million to 18 million tons is the right number?

I would say yes. We have a very good level of confidence. And the difference is that 2010 was significantly drought. Just remember, there were even fires. So this was a very, very significant problem as one of these -- every 20 years time of situation. That is one situation. The second one is we already are in the third year of significant planting and replanting. And you remember, we inherited some of the plantations from Moema where it was under-invested. So the quality of the agronomics are significantly higher. So our level of confidence is continually going up.

Okay. And pointing to the low end of it, sort of long-term $8 to $10 a ton profit range, is that just a function of the fixed cost you leverage in the mill as you get lower crushing?

Yes. If you look at the $8 to $10 range, there are a number of variables that we would have to consider. I would say, as you go up in the range from a cost standpoint, we get more effective and you move up to the upper end of the range. And at the lower part, you'll be at the lower. That's correct. But there are also inherent price assumptions in that range and a number of other assumptions that are important for the model. But for this year, we're very comfortable that we'll be there in longer-term as we move up the capacities, while our projections show us that, that range is very realistic.

And last one before I turn it over. Hearing some chatter about a potential for price caps on soybean oil in China. Are you hearing stuff along those lines? And what would be the implications for your business?

No, we are not hearing anything like that. Now obviously, if there are some limitations, it always has an impact. We have had it before and -- but we don't hear anything.

Our next question comes from David Driscoll from Citi Investment Research.

Just wanted to start off, Alberto, with kind of a big picture. 1Q results are weaker than consensus expected and my expectations. And I think it's obviously, just looking at the stock reaction, it spooks people. But did I hear you guys right in saying that even with these results, you see the full year better than you did 3 months ago, and you believe that 2012 is ahead of the 2011 results in sum total? Can you discuss this just a little bit?

Yes. We feel, today, more comfortable, more confident about 2012 than we felt in February. And we think that agribusiness will offset the shortfalling of fertilizer and sugar & bioenergy. So our level of confidence has increased.

And the reason why this is so different than, say, the first quarter trend, is -- is it correct to say that the sugar business results and the Fertilizer results are largely confined to the first quarter? And then as we get that new sugar crop, literally it's old crop, new crop, the dynamic changes, the margins change significantly in sugar because of that reason; and in fertilizer, you just don't have this high-cost inventory that's going to drag your results down in the future quarters. Is that a correct statement?

It is correct. But I would add also that the picture has improved in the area of agribusiness, which obviously is, for us, the most important division. And margins are higher in oilseed processing and the outlook for margins, both in oilseed and in grains and also, in terms of volumes, are better as we look into the year. And also, as we are deeper into the year, we have more visibility of the impacts on sugar & bioenergy and also in fertilizer.

And Alberto, I fully agree with your comments that Agribusiness is the bulk of the operation. Yet I will tell you that from the outside perspective, there's an incredible amount of searching or inspection that investors are doing on the sugar and fertilizer operations, even though they are quite smaller. So it's these things that are almost somewhat of a distraction, given the performance in agribusiness and the direction of that operation. On risk management, and specifically in fertilizer, do you guys think your risk management is performing up to par against what it should be doing in fertilizer?

I think it is. In terms of fertilizer, you are right to see that when you think about what is the importance of fertilizer for the whole of Bunge, it is very important. But it's a very important component linked to agribusiness. But as a percentage of the whole, it is not that important. Now when you look at the drop in input prices that occurred and when you see how we performed, I think it has showed that we managed as good as we can. We have to remember that we have not found yet a solution how to hedge inventory. We have reduced significantly the cash cycle, the time, the amount of inventories we have. At the same time, we have been able to increase our volume this year. We have increased our market share. But that portion, we have not completely solved yet. And we continue looking for opportunities. But I feel it is well done, as good as it can be done. And in terms of sugar, we have to remember, let us get to our full capacity of agriculture, and then we will see it. And we feel quite confident there.

One more comment on fertilizer. You made this statement that you expect full year results to exceed 2011. There is a lot of room in there relative to -- I believe, that the historic comments you've made is profitability in fertilizer normalized $75 million to $100 million, something like that. Being better than 2011 would seemingly be a relatively easy challenge, given what it produced. Can you be more specific? And I mean, there's too much room in here for me, I don't know what you're trying to tell me on fertilizer profitability. Is it getting close to this target profitability on a full year basis, $75 million, $100 million? Or are we still way off the pace because of the first quarter result here?

I think, David, we still think on an annual run rate we can get to that $75 million to $100 million type of number. We do not believe we can get to it this year, the $75 million -- $74 million loss if you include the notable item, $50 million without it in the first quarter is quite large. We think we'll be able to recover that, but not recover that and get back to the type of numbers we've given you. And so I think, longer term, our run rate target hasn't changed. The business at times has shown it can do that. This period with the drop in the international prices has set it back. As Alberto said, we continue to search for methods to hedge that, but we have not found a satisfactory method. But when our Fertilizer business is up and running and doing well, it can make the $75 million to $100 million. I think if you analyze the performance through the second half of the year, you'll get numbers up in that range, maybe even a little better.

Okay. And just final question for me is back to -- some other folks are asking a little bit about this, the 17 million to 18 million metric tons in sugar. Since you are clearly into the harvest right now, I think one of the last questions, I forget who asked this, but potential for further reductions. Generally, once you're into harvest, what are the chances for further reductions? Do you have a pretty ironclad view that the 17 million to 18 million is very firm because you're actually cutting the cane now?

Go ahead.

I think, when you look at it, harvest -- when you start harvest, the cane isn't finished growing. The sugar matures throughout the harvest. That is why, in the first portion of the harvest, you get the lower sugar yields. And in the later period, the yields are higher. So weather continues to remain important and can affect the crop either way. We've made reasonable assumptions on the weather. I think there's room for a little bit of downside, but there's probably also room for a little bit of upside if the weather is perfect. But the weather question isn't answered till maybe the September time period, something like that.

You also have to remember that the long-term trend of yield is above 80 tons per hectare and all the way to around 85. And what we have seen is something in the low 70s. So there is room on that part as well on the yield side.

Our next question comes from Vincent Andrews from Morgan Stanley.

If I sort of was digesting all of this conversation on fertilizer properly, what it sounds like to me is that the $75 million to $100 million of EBIT in fertilizer is really achievable only in a situation where prices are flat because of the tie-in with the agribusiness and your need to barter fertilizer for beans. You have to have a certain amount of inventory on hand at all times, which puts you at risk to volatile price movements. Obviously, this can be a good thing too, right, if prices spike. But if -- so am I correct? Let me just start there. Is that a correct statement or no?

It's correct. So there is upside potential when prices go up and downside when prices drop. So the $75 million to $100 million is on most stabilized prices.

So then it's also reasonable to assume there would be periods of -- there'll be 12-month periods where it could be over the $75 million to $100 million or no?

Yes.

Okay, right. That's helpful. Secondly, when we think about the sugar business, there's a fair amount of debate out there right now about what the floor price for sugar is and where the breakeven cost of production in Brazil has gone. And it sounds like it's actually gone up quite substantially in recent years, I think, when you got into the sugar business in a big way. We used to talk about a $0.14 sugar price as sort of the floor. And now, we were down in Brazil, and we're meeting with people, and then people were talking about a $0.20 or $0.22 breakeven cost now. Do you have any thoughts on that?

We share with you -- we share this with you. Same thoughts.

$0.20 to $0.22.

$0.20 to $0.22. And the driver between the $0.14 and the $0.22, in your view, what's caused that increase?

It's a mixture of exchange rate but also costs locally. Fertilizer have gone up, energy has gone up, labor cost has gone up. So it's local inflation, but also the exchange rate.

Okay. And then maybe as a last question, and I know you don't give guidance and I know this is a question that sort of can imply guidance, but how should we be thinking about your return on invested capital this year in terms of -- do you think you'll make a material improvement in that ratio this year? Obviously, there are moving parts in it in terms of what the balance sheet looks like as well. But any general comments there?

I think we will be getting close to cost of capital.

Not above this year?

We hope so. And we are working very hard to get above. But...

Understood.

Our next question comes from Tim Tiberio from Miller Tabak. Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division: Can you give us an update on how the port facility in the Pacific Northwest is ramping?

It is operating well now. We have unloaded many rail cars and loaded a couple of ships. Obviously it's early part, so we are still in the fine-tuning. But we are happy with where we are. Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division: And when do you think that will start materially contributing results?

It will be very important when the harvest starts in the second half of the year. Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division: Okay. And just one final question. I had heard some discussion around Brazil potentially increasing the flex blend from 20% to 25%. I don't know if that was just a rumor going around. But just wondering if you think there is a probability of that happening this year and whether that factors into your more positive outlook for the second half?

I think the main issue is that there is not enough ethanol in the domestic market for this to happen at this stage. So the reason it was reduced from 25% to 20% was because there is not enough ethanol. So I think there is a potential for more incentives to expand ethanol, which would mean a higher price for ethanol, and then we could see a scenario like that. But at the moment, what is needed is more incentives for expansion of production. And that is not there yet. So gas prices would have to be a little bit higher to accomplish that.

Our next question comes from Ken Zaslow from Bank of Montreal.

Just a couple of questions. One is when you guys talk about the improving agribusiness environment, can we just talk about the South American issue? Because there's a couple of issues down there that seems to be kind of weighing on the outlook in [indiscernible] if you can kind of help us clear that up a little bit. First, I get that the South American Brazilian crop is going to actually get -- is coming in there for your margins is going to be higher once they come in at the typical seasonality of it. But can you talk about the duration of this relative to historical lows, right? Because the crop is actually coming in smaller. So is it possible that the positive impact from the Brazilian crop coming in will actually be smaller duration than normal? And how do you make up that profit somewhere else around the world?

I would say the size of the South American crop is large, but it is not too large like it looked at the beginning. So it is at the right amount, so that is why we have been performing well. There is a -- we have to remember, there has, over the last couple of years, been a significant increase in domestic demand in Brazil. And so -- both in meal and in oil. So the structure has improved domestically inside Brazil. At the same time, the crop is big enough to satisfy the local and export needs. But it's not too big, that's what we are saying. If it would have been too big, it would have affected the Northern Hemisphere, especially the U.S. crop or the U.S. export potential. Now there will be business opportunities for the U.S. to export.

Can you give us parameters, what is considered too big and what is considered too small?

Too big would be if it would have a long tail into the Northern Hemisphere crop.

And if it was too small -- like what would make you nervous if it got too small?

I think we have basically harvested already Brazil, and we are at the end of the Argentine harvest. So we know what it is there. So it is enough for...

But going forward, like for next, not for this year -- but if I look forward next year, because it seems like the crops, whatever size they are, they come in -- you kind of say, "Look, Bunge's business now has kind of worked pretty well now what the crop size is." But like -- if I look at next year or the year after, what do you consider too small? What do you consider too big? Like -- I'm just trying to figure out what your sweet spot is.

What you have to remember, Ken, is that the world needs the South American -- especially soybeans but also the grains. So the demand is growing at 4%. So year-after-year, we need some 10 million tons more of the beans. So we should continue seeing growth there.

I think, Ken, it's hard to give you a precise answer to your question because it depends where the world's supply and demand balance sheets are and how much product is in stock. With the reduction in the bean crop this year in South America, as you come -- their season is going to end earlier, so there's going to be a lot stronger pull on the U.S. crop to fill that need and potentially enough of pull on the new U.S. crop that you're going to need a big South American crop, and they're going to have -- and the U.S. is going to have to stop crushing earlier because they're going to be exporting at a higher rate earlier in the season. So that could be very good for South America. And then we want a crop at least the size to get us through to the next North American harvest. So it's a very bullish scenario for soybeans and a very bullish scenario for where our assets are situated.

But the window, though, for this crop is going to be smaller?

The window for the South American crop will be smaller because they won't have the product to keep exporting as long as they have. But we do think there are sufficient supplies that they can fill the export demand until the U.S. crop can come up and start running and then they will fill the gap. You won't have the overlap between the 2 crops for the extended period you had before. Typically, both are in the market at the same time. This year, it won't be precisely sequential, but it'll be more sequential than overlapping.

And that is the reason why the margins have expanded.

Okay. In Argentina, I guess I'm kind of more of the camp that Argentina margins don't look so great, and they don't look like they're going to go anywhere given the whole issue between Spain and Argentina. Can you talk to that? And again, how do you make it up somewhere around the world? Because I think -- it sounds like the Brazilian side of it is more debatable between you guys and us. But I think the Argentine side is probably less debatable. So you've got to make the profit up somewhere else. Can you talk about that?

I would say that the biggest risk is in the issue of export of biodiesel to Spain. And we feel that, that drop in profitability will be offset by increase in the margins in Spain and the rest of the Mediterranean. So more or less, we expect it to be offset because Spain will need to get the biodiesel from somewhere. At the moment we are not operating our biodiesel plant in Spain. So it could start at any moment.

And the last question I had is on sugar. Look, just hearing from all the questions, it sounds like obviously the breakeven costs have actually gone up, the sugar prices have come down, your size of your crop has come down. But yet $8 to $10 margin on a run rate is kind of where you're looking -- it sounds like $7 are going to be for the year. But it's hard for me to kind of figure out how the $8 and $10 -- if the structure has gone, if the cost structure has gone up, the price did come down. How do you rectify all that? Like why is that $8 to $10 still the right bogey?

The proof really is that the sugar prices are today at $0.24 per pound or, plus/minus, could be a little bit less. And so -- and they are not where they used to be at $9. And why is that? It's because there needs to be enough profitability for the farmer to expand. So this is what we talked earlier in the call, which is something between $0.20, $0.22 per pound. Otherwise, we will not see an expansion. And that is why -- you need to have an incentive. So there is demand in the world for the sugar. There is demand for ethanol. So there has to be the prices to justify the expansion.

And I think, Ken, a couple of specifics. When we talk about higher cost, that -- those are costs that were carried in from last year's crop when we were in the 14 million to 15 million ton range of production. If we get back to the 17 million to 18 million where we were, I think our core structure is broadly in line with where we thought it was. So there was not a decline there. The other thing to note when you look at the sugar price as it pertains to our business price, the real price is arguably more important than the dollar price. So while you've had sugar prices drop in dollars, they have not really moved that much in reals because the reals has gone the other way. So I understand your points, but I don't think our cost structure has changed significantly, and the price point has not changed significantly. And remember, on the sugar side, we do have a hedging program in place. So we're not always subject to the current sugar price.

Okay. And your optimism is founded in forecasting or in current fundamentals that you're seeing?

I think -- it's a mix of both. I mean, we're a lot surer on what our crop is for this year now. We know where our hedging programs are. We know where ethanol prices seem to settle. So it's a combination of those things that we've seen put into a forecast for the year. Right? So I'm not sure which difference you are. But -- people are trying to get at this earlier. You get your first real good look at the crop in April and then you have the finishing weather. But it's not as important as the weather probably before April. So we've got a pretty good idea on the 17 million to 18 million tons. But I can't sit here and tell you finishing weather won't affect it. We have a pretty good idea of what our costs are for the upcoming season, and we know where we're hedged. So we put all those into the model and come out to the range that we've been indicating on the phone.

Our next question comes from Ian Horowitz from Topeka Capital Markets.

Two just real quicker, Alberto. The $0.20 to $0.22 a pound for profitability, is that both for processing as well as at the farm gate? In other words, that kind of price would -- you're saying would also promote hectare expansion? Is that correct?

Yes.

Okay. And then, quickly, we've talked a little bit about Argentina and then -- can you just talk a little bit about this Brazil and the IOF situation? We've been hearing some conversations of extension. The change in duration of this IOF issue is going to change the way foreign investors invest in capital spending or -- as well as working capital such as sugar assets. Do you see any of that? Or can you comment at all on that?

We are obviously very close to that issue because it has an impact on our operations. It may change the way we do some things, but we don't expect it to have a significant impact on either our operations or our financials.

Does it change the breakeven of the sugar crop?

No.

No, not at all.

Your next question comes from Ryan Oksenhendler from Bank of America.

I just want to ask -- follow-up on the agribusiness. The change that's different from what your outlook was at the beginning of the year is that supplies in South America are a little bit tighter. Is that correct? I felt like by February, you already kind of knew that the estimates were going to be below what the USDA was forecasting. Is that it?

Not really, because Argentina really starts at that time, the crop. And Paraguay saw the -- you really have the picture only very clear in the middle of March, end of March. That's number one. The second -- that's one part that gives us the indication. Secondly, also, we needed to see how the impact of the winter kill was in Europe. In addition, we needed to see how -- very important is how the margins performed. And margins improved both in U.S. and China. So it is -- there are significantly more factors that are coming to the picture.

Right. But going back to I guess Ken Zaslow's question, if margins improved in North America and China -- or I'm assuming they were probably worse in South America then. So I guess net, they were that much better than the losses or the decline you were seeing in South America? Is that the net benefit overall?

I think you've got processing margins, but you also have handling margins. And export capacity is going to run at very high levels, both in South America and in North America and Europe during this period. Because when they are the producing region, they're going to have to run at very high capacities, both in processing and handling. So it'll move through. I think, Alberto referred to the winter kill. If you get less wheat in the world, you're going to have higher soybean meal consumption because wheat won't be used as much in feed rations, and that is favorable for meal. So it's a variety of factors around those crops. I don't know that I would simply say a certain size crop matters. It really matters what it does to capacity utilization and the pull on our system at any one point in time instead of an absolute crop number. And the Brazilian crush margins have been fine. So I think we're comfortable and our view is changing because of the way the crops are lining up and the way it's putting a pull on our system to get the product in the places the customers need it.

And then in terms of the 17 million to 18 million metric tons for cane, you're assuming that the rest of the year, there's normal weather? Drew, is that fair? Because you said there could be some upside or downside to that.

Yes, it's fair.

Yes. When we say normal weather, it is -- they are also -- we plan for some issues because you always have some issues. So it is all kind of -- there are going to be pockets of problems here and there. So that is why there might -- yes, normal weather.

Okay. And then in terms of the planting, I mean, have you done any yet for this year? I mean, you plan to get 18-month cane right now? Or have you -- are you just starting planting like 12-month cane right now?

Yes. The planting is going as expected, much better this year than it was last year.

So have you planted 18-month cane recently?

Yes, we have. We have been planting every day.

Okay. And I'm assuming, getting to -- you're assuming normal weather again for getting to your 70,000 -- 7,000 hectare target?

Yes.

Okay. And then just last on fertilizer. I've -- when you had changed that business, you had made a change in terms of -- when you took inventories, you were allowed to price your retail prices closer to the spot market and that would potentially become a pasture business and that you wouldn't have wild swings where you'd be below the normalized range or above the normalized range, going back to Vincent's question? Is that not true?

It is. We dramatically improved it. But you have to remember that there's quite a long lead time to get the products to -- to have it in place. So they come from Canada, from Russia, from all over the place to inside Brazil. So on average, we need to have a turn, an inventory turn of something like 45 to 60 days, which is a dramatic improvement from the past when it had to be 5 to 6 months. So we did improve it. But we still have to carry the risk, the price risk for these 2 month. So we can't -- we have not found a way to hedge it yet. So that is the problem.

Your next question comes from Christine Healy from Scotia Capital.

Just a couple of questions for you. First, there's been some recent reports that Bunge is looking to expand in Russia. Just hoping, can you talk about the political climate in the country right now and how open the government appears to be with foreign investment in the ag sector?

We have continued looking for opportunities to expand our business. We have started some -- something like a little bit over -- around 10 years ago and continue expanding. And obviously, there are issues like we have in every parts where we operate. But we have felt quite receptive. So we continue looking for opportunities to expand.

Do you know what the timing is for a decision on United Grain?

We don't talk about rumors. And we, all the time, are looking for opportunities to expand. Organically, greenfield, brownfield acquisitions. So that's the way we look at it.

Okay. And just a question on just the competitive environment in your industry. Glencore recently bid for Viterra, and today there's reports that Mitsubishi is interested in Gavilon. So I'm just curious to hear what are your views on what impact could be had on the industry by commodity traders moving to own grain infrastructure. Do you expect competition to get tougher? Any impact on margins? That'd be helpful.

I think what it really shows is that the model we have been talking about is the right one. You need to have large operators with -- operating with many products in many geographies, our model. And when you see the kind of movements we are seeing, it's exactly like that. It's a consolidation and companies becoming larger. So I think it is the proof of the model.

You don't expect really any overall impact on industry dynamics with these moves?

I think it is -- long term, it's the right thing, because you need well-capitalized, large companies which has, obviously, the secondary advantage that all need to make money. So there could be a more rational -- should be a more rational behavior.

Your next question comes from Robert Moskow from Credit Suisse. Robert Moskow - Crédit Suisse AG, Research Division: I wanted to talk about the pattern of acquisitions over the past few months. There's been announcements of an investment in Indonesian palm; edible oils in India; a bio products company in Canada, Climate Change Capital; and now kind of these talks about Russia. Do you worry, Alberto, that the company is losing some focus? And you have a sugar investment that's not paying off. Is there a risk here that, that management is getting spread out and needs to -- really should be focused on getting sugar right?

I don't think that we are taking the eye off the ball. I think we are very, very focused. When you look at agribusiness, you can see is, is despite difficulties in the environment, the company is performing very strongly. And when you look at in detail, really, most of the growth is in agribusiness. So when you look at Food Ingredients, which is another area that has been very core of Bunge, we, today, are -- our profitability is 2.5x to 3x bigger where it was 5 years ago. So very, very, very clear focus on returns and growth. So when you think about agribusiness, we, by now, have over 60 crushing plants; over 50 refineries; operating 30 ports; very, very, focused on extracting more value on it. Now obviously, we have to look at also other opportunities. Palm is something that we have been looking at for the last 10 years, and we believe that we are doing the right move. It is small. It's a minority investment, but I think it is right in the center of our strategy. And when you look at some of the other acquisitions, the one in India is exactly strengthening our food & ingredients business in the oil sector. Now obviously, some of the -- that makes noise like we have been for many years in the carbon credit business, that is very close to what we do. So it doesn't -- it's not a major component. But if we are able to strengthen some of our existing businesses, I think that fits very well our strategy. Now coming to sugar, we feel also very comfortable and very confident where we are in. It is very difficult when you have a business that is so high in fixed costs and when you don't have -- and when you're not operating at full capacity. So the difference is going to be when we will operating at full capacity. And we are very confident that we will be able to reach our targets. Robert Moskow - Crédit Suisse AG, Research Division: And let me ask the follow-up on sugar and -- I was listening to the explanations on what's happening on ethanol, and it strikes me that what Bunge is kind of counting on is that the rest of the sugar industry will actually increase production of ethanol, and that will help crowd out some of the imports that have come in from the U.S. But if the margins are so weak in ethanol, what's the incentive of the industry to increase production to do that?

No, no. We don't -- that's not our view. What we -- we are going what we believe is right. There's very strong demand. We don't need to rely on others. What we demand -- we see the sugar demand growing. We see the ethanol demand growing, and we see the electricity demand growing. All the 3 areas we are in. What we are focusing is all on getting our model right, enough planting so that we can run at full capacity. And the investments we announced in the past is -- we increased to get the balance right. More cogeneration, have the mills operating at the right size so that we can get to our target of 2% points above cost of capital. I think what you were probably referring is there are moments where there are movements in the industry where, perhaps, sometimes, you have too much -- for a short period of time, there is a short term -- there was a couple of weeks where there was a lot of inventory of ethanol, and that had a short impact. I think it was 5 weeks where there was a price which was a little bit lower than we expected on ethanol. But these are normal type of things in the market. I don't know if I got your question right. Robert Moskow - Crédit Suisse AG, Research Division: Well, what I'm referring to was the government has reduced the blending rate from 25% to 20%, right? And they're doing that because they feel that the industry is not producing enough sugar for domestic consumption. And I think that you -- from the looks of the press release, you want that blending rate to go up again. But it's not going to go up unless other companies produce more ethanol. Is that right?

At the moment, it can't go up because there is not enough ethanol. So everybody else has to invest to have more production of ethanol. There is pent-up demand. So the situation is constructive for our industry. There's much more demand than supply. That is the reason the government had to reduce the blending rate from 25% to 20%. As the supply goes up, there is room for the government to increase again the blending rate from 20% to 25%. Robert Moskow - Crédit Suisse AG, Research Division: So, Alberto, does that mean that, that reduction from 25% to 20%, that's not really what hurt your business in this quarter or over the last 12 months? It's just -- that has no impact on your business?

It might have been a little bit of timing. But it's a mixture -- it's really -- I would say it's minor. It's probably more a special situation that you had suddenly, a lot of older shipments from ethanol, from the U.S., arrived at the same time. There was a -- and the prices did not go up as expected. It's a mixture of things. You remember that also, because as the crop ended up being shorter last year, so the ending cost of goods sold of ethanol was a little bit higher. So there was that movement. A couple of things that reduced the margins. But remember that we expected this to be more or less where it was. There was a little bit -- the drop in margins was a little bit more than we expected. But we expected the loss in the quarter in sugar & bioenergy. Robert Moskow - Crédit Suisse AG, Research Division: Market sales prices were pressured by a reduction in ethanol blending rates and increased volume. The way I read the press release is that, that hurt your prices and hurt your margins.

Your next question comes from David Driscoll from Citi Investment Research.

Just a quick follow-up. A couple of questions. The first one is, Alberto and Drew, what do you guys think net capacity additions are industry-wide in oilseeds on a global basis? Are we -- we've got a couple announcements of plant closures in the U.S. I know there's a few companies that are completing some plants that they had started a while ago. And maybe if I can push this question a little bit more, part of it I want to know, what is the net additions globally in oilseed capacities for crushing? And then secondarily, are you hearing anybody announce new greenfield -- making any new greenfield announcements?

The net additions in worldwide are less than the demand. So the capacity utilization should go up over the near future. And we still have excess capacity in China, and we have in U.S. So the reductions of capacity in U.S. is still not enough to bring it completely into balance. In China, it is more a situation that the capacity addition were of very efficient plants. So the very inefficient plants have not been operating or at lower profitability. So the trend is the right one, but we do need -- especially in the U.S., we do need either more capacity reduction or stronger demand increase.

Okay. Next question is, a little one. Drew, can you give us some insight on interest expense for the year? CapEx and depreciation? And if you said those, I apologize. I -- there was a lot of things going on.

I don't have it right in front of me, David. But I think if you annualize interest, you'll come pretty, pretty close. Annualized net interest, you'll come pretty close to what it would be with always the chance that commodity prices, in fact, back that obviously. Where we are with depreciation is about $500 million, $550 million, $575 million, in that range. And what was the third you asked me? I'm sorry.

Capital spending.

Capital spending, we said about $1 billion, and we're -- $1 billion, $1.2 billion, and we're still on target for that. No big change.

Okay. Final question for me is, Alberto -- some people asked this question, but I want to be more deliberate about it, this YPF issue and nationalization. I mean, some investors just asked me, can they -- would the Argentine government ever turn around and try to do this in the grain industry? Can you give us some thoughts about this? I mean, you're awfully close with these folks and have been for a long time. Is this a realistic event that ever, we could wake up one day and find out that part of Bunge's Argentine assets are being nationalized?

I feel quite confident that our industry is different than the energy sector. We have always been a heavy investor all the time. The best plants, state-of-the-art plants are in -- most of them are in Argentina. And it's a very competitive environment. It is -- has always been extremely well integrated with the global system. So I do feel that it's a complete different situation in our industry.

Okay. So bottom line, no, you don't -- you feel pretty strongly that this is an isolated situation outside of your business?

I think our industry is different.

Your next question comes from Lindsay Drucker Mann from Goldman Sachs.

I just wanted to talk about the CapEx guidance and then the commentary on growing in selective areas. Can you just talk about your internal decision-making process on putting capital to work in acquisitions? Or capital spending versus buybacks or dividends?

Obviously, this is a very hotly debated internal subject because the industry is an industry with strong growth, organic growth. So we always have much more projects that we have funds available. So the biggest fight internally are for capital allocation. So we privileged a mixture of core business plus highest returns. And so we always look at what brings the highest net present value of future cash flows. So very simple, we do it like that. So that is the way we allocate the different businesses. And I think you saw it very clearly, the fact that we -- the way we increased our business or expanded our business into sugar & bioenergy was with new equity from the outside. We did not sacrifice our cash flow. We did focus on continue growing our agribusiness and food & ingredients business. So this adjacent component of our strategy and now is also core business, at the beginning, had its own funding. So obviously, the other component is that we have a high hurdle rate for the projects, and we have demanding targets for the projects. And the limitation of our CapEx is related to the fact that we want to be a strong BBB company. We are getting there with all the rating agencies, and that's where we think is the sweet spot of what we should be. Obviously, acquisitions have an advantage that normally, you get directly the cash flow from the acquisitions. And we have been very successful in the past with all of the integrations. But we also are very careful because there are some risks. And I think we have shown that we are disciplined in both of the areas. I don't know if that covers your question.

That's helpful. And then also, do you expect to be free cash flow positive this year?

It really depends always on commodity prices. So if commodity prices do not increase more, or if they give back some of the increases, we should be breakeven on free cash flow.

The last question comes from Christina McGlone from Deutsche Bank.

Drew, just a quick question on Agribusiness SG&A. It was a lot higher than I thought. Is that -- is this $215 million, is that the run rate now that we should be using? Because I thought the real weakened? I mean, yes, weakened year-over-year. So I thought that, that would actually provide some relief for you.

The real did not have a big effect on this quarter versus the prior quarter. It was pretty immaterial. I would say, our run rate will be a little bit lower than it was in this quarter. We did take some bad debt reserves in the quarter relating to some farmer financing, which goes into the SG&A line. So that pushed it up a little bit. And we have invested a little bit more money in our marketing efforts in Brazil, because we think there's opportunity there. So the run rate would be somewhat lower than it was in the quarter.

And the bad debt was for farmers now? Or was this back like the '05, '06 stuff?

There are actually 2 that comprise most of it. One was current and more a customer than a farmer. The other one was older from '05, '06, and it involved the fact that the collateral turned out to have less value than we expected.

We have no further questions at this time.

John, thank you. And thank you, everyone, for joining us today.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.