Feb 13, 2008
Executives
Mark Haden, Investor Relations Alberto Weisser, Chief Executive Officer and Chairman Jacqualyn Fouse, Chief Financial Officer
Analysts
Robert Moskow - Credit Suisse Christina McGlone - Deutsche Bank Ken Zaslow - BMO Capital Markets David Driscoll - Citi Investments Christine McCracken - Cleveland Research Diane Geissler - Merrill Lynch Vincent Andrews - Morgan Stanley Pablo Zuanic - JP Morgan
Operator
Good day everyone and welcome to Bunge Limited’s Fourth Quarter Conference Call. (Operator Instructions) At this time, for opening remarks and introductions, I would like to turn the conference over to Mr.
Mark Haden.
Mark Haden
Thank you everyone for joining us this morning. Welcome to Bunge Limited fourth quarter 2007 earnings conference call.
Before we get started, I wanted to inform those of you who may not have seen it in the press release this morning that we have prepared a slide presentation to accompany the discussion of the fourth quarter financial results. They can be found in the Investor Information section of our website www.bunge.com under Investor Presentation.
With me today to discuss our results are Alberto Weisser, Bunge’s Chairman and CEO; and Jackie Fouse, Bunge’s Chief Financial Officer. Reconciliations of non-GAAP measures disclosed orally on this conference call to the most directly comparable GAAP financial measure are posted on our website in the Investor Information section.
Before we proceed, I would like to read the Safe Harbor statement. This call may contain forward-looking statements within the meaning of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 including statements about future financial and operating results.
These statements are based on management’s current expectations and beliefs and are subject to a number of risks, uncertainties, and assumptions that could cause actual results to differ materially from those described in the forward-looking statements. The pertinent risk factors can be found in our SEC filed reports.
And now, let me turn the call over to Alberto.
Alberto Weisser
Good morning, everyone. 2007 was an outstanding year.
Bunge leveraged its integrated global operations, leading positions in key markets and good teamwork to produce record results. In 2007, the agribusiness and fertilizer markets were characterized by improved structural conditions.
Demand for Bunge’s end products grew and farm economics in Brazil strengthened. Our risk management strategies performed well in a dynamic market, and we were well positioned to serve our customers during a period marked by significant supply dislocations.
The conditions that made 2007 compelling should continue in 2008. The USDA forecasts higher global protein meal and vegetable oil demand, as well as strong demand for and trade in other agricultural commodities.
Crop prices should remain high, promoting input purchases by farmers. Not all market forces are working in Bunge’s favor, however.
For example, the strong real will increase local costs in our Brazilian businesses, and higher input costs could pressure margins in fertilizer and edible oils during the year. We plan to build on our success by continuing to follow our strategy of investing for growth and efficiency in our core businesses and in complementary value chains.
In 2007, we expanded our oilseed-processing network and launched a regional consumer packaged oil brand in China. We also enhanced processing assets in the Americas and Europe, purchased our first sugarcane mill, and established a joint venture with OCP, the Moroccan fertilizer manufacturer, which will provide our business with a valuable supply of fertilizer, raw materials and products.
Construction on the venture’s production facilities is well underway, and we expect initial phosphoric acid capacity to come online later this year. This morning we announced an agreement to acquire Walter Rau Lebensmittelwerke, one of Germany’s leading private label and branded margarine producer.
With this acquisition, Bunge takes another important step in our strategy to strengthen our European food products business. Overall, we are pleased with how our asset network is growing and becoming more balanced across geography and also products.
Now I’d like to turn over the call to Jackie, who will take you through the fourth quarter results and our outlook.
Jacqualyn Fouse
Thank you, Alberto, and good morning everyone. Thank you for being on the call with us this morning.
As Mark mentioned, I will just remind you that there are some slides that you can follow along with my comments on the web if you have access to those. Starting off, we’ll look at some key line items in the income statement for both the quarter and year 2007 for the Bunge Limited group.
Looking at the volume numbers we saw very solid growth in the fourth quarter in both agribusiness and food products. Fertilizer volumes were a bit down as we’ve said that they might be due to the strong Q2 and Q3 in ‘07, and Q4 ‘06 that included some late season buying.
With respect to segment operating profit the growth there was led by agribusiness as well as fertilizer gross margins, which held up quite well during the quarter. These favorable impacts more than offset somewhat higher SG&As in both of those segments where the primary increases came from currency, somewhat higher variable cost, and growth in our infrastructure as we added some people here and there notably in the sugar business.
In edible oil we started to see some benefits from price increases that we took in Europe during the fourth quarter but this is more than offset in the quarter by notable item charges. Milling was somewhat impacted by higher input cost for wheat and an impairment charge.
At the net income level that was affected by the return of the effective tax rate to a sustainable range. Now we are at about 26%.
So when you compare that to Q4 of ‘06, when the company recorded a benefit in the tax line that’s why you don’t see growth in net income. EPS followed net income and includes the impact of the convertible shares, both those issued in November of ‘06 and those issued November of ‘07.
With respect to the full year on the volume side agribusiness, fertilizer, edible oils, all posted mid-teens volume growth for the full year. Operating profit wise, growth was led by agribusiness and fertilizer, and as you know, we’ve had a tough year due to high input cost, higher SG&A cost as we invested in an infrastructure there and the impact of notable items charges as well.
And the same factors for the full year as for the quarter drove somewhat higher agribusiness and fertilizer SG&A, so again currency impact, variable cost increases, and some investment in the infrastructure. The same phenomena applied to both the net income and earnings per share for the full year as I discussed for the quarter with respect primarily to the tax rate returning to an ongoing sustainable range versus the benefit recorded last year.
When we look at the result by segment, starting with the quarter, agribusiness was driven by very good results in oilseed distribution, particularly in Europe by grain distribution and origination. Meal volumes were also strong and structural margins in the meal business especially in Europe and the Middle East, and we saw strong gross margins in Europe, North America and South America.
Ocean freight performed its role well through management of both physical flows and risk. On the fertilizer side for the quarter, again lower volumes in the quarter for the reasons I’ve already mentioned and the operating profit growth there came about from higher unit gross margins, which more than made up for the lower volumes and somewhat higher SG&A.
On the food side of the business, that one was particularly impacted in the quarter by notable items but as I mentioned we did start to see benefits from price increases taken in Europe and in Brazil edible oils. The margins were very solid in the quarter.
Moving to the full year results for the segments, again you’ve heard some of these before, some of the same fundamentals held up in the fourth quarter as we saw in the third quarter. Agribusiness results were strong across the board for the full year with all regions performing well though the stronger real has somewhat negatively impacted our profits.
The strongest contributors were oilseed processing in all regions, and grain origination and distribution as well. Ocean freight again performed well for the full year as in the quarter with respect to managing physical flows and risk.
Fertilizer wrapped up a very strong year with above average historical volume growth and high margins driven by high the international fertilizer prices and our ability to take advantage of our local integrated model in Brazil. Food experienced a difficult year during the overall year 2007 as a result of high crude oil prices and a limited ability to pass that higher cost on through price increases until we got to the latter part of the year.
And profits were also negatively impacted during 2007 by higher SG&A spend as we continue to build the business primarily in Asia, in Europe and then by some notable items charges as well. Turning to the balance sheet, a few things that we would like to highlight, historically high agriculture commodity prices prevailed throughout the full year 2007 and caused inventory levels to increase significantly.
Despite this, we were able to manage overall operating working capital growth to something less than that growth in the inventory and our cash cycle improved versus last year by about 11 days. This shows that we have made good progress in terms of our asset efficiency efforts and we saw a positive evolution in both days sales outstanding, which were down about five days, and inventory days, which were down about six days.
We also strengthened our balance sheet through a combination of higher profit generation and issuance of a mandatory convertible in November of 2007. For those of you who can see the slides, it’s Page 7 or Slide 7 on the webcast, there is a graphic there that shows you the evolution over the last six years since 2001 in these key items of the balance sheet.
And over the past six years you can see that Bunge’s operating working capital has grown roughly in line with sales, though somewhat slower than sales. And our shareholders’ equity has increased significantly faster than net financial debt.
So we are happy with the state of our balance sheet. With respect to cash flow, in Q4 we were pleased to see strong results and funds from operations before working capital changes with those being driven by profits.
And those strong funds from operations more than offset a modest increase in working capital, thus allowing us to generate positive cash flow from operations in the quarter. For the full year, cash flow from operations remained negative but modestly so, given the significant growth in working capital for the year based on higher commodity prices.
When we turn to the 2008 outlook, as Alberto already mentioned, we see very solid positive market fundamentals for our business. We continue to see growing global demand for soybean meal and vegetable oil, with the meal growth forecast at just over 5% and oil at about 4.5%.
So far we see South American harvests looking good. And we except for fertilizer demand to be strong on continued good farm economics.
As far as particularly we think our food product segment should improve, then we were working on the efficiency of our food network of assets especially in Europe and South America. We were again seeing that our price increases held and a positive impact from that in Europe.
And we expect to see good results from the investments we have made in the business but are mindful that input costs in some areas could remain high. There are some broader headwinds that we will face going into 2008.
The stronger real is increasing cost in our Brazilian businesses. We are also seeing some indication of inflation in emerging markets that we will deal with on the cost side, and higher input cost could put some pressure on margins in both fertilizer and edible oil.
As we move into 2008, we should keep in mind that during 2007, as a result of our global footprint and asset infrastructure, we were able to benefit from opportunities that arose, where we were able to move product through the system and manage market dislocations and supply demand and balances to our benefit. These included poor wheat production outside the U.S.
and poor soft seed production in Europe, as an example during 2007. We don’t know to what extent such opportunities will be available in 2008, and we don’t include the potential for those in our guidance.
So with that backdrop just to highlight the financial guidance for 2008, we are forecasting net income of $830 to $870 million or $6.01 to $6.30 per share. That includes an assumption of an estimated weighted average of the 138 million shares outstanding.
Again, that includes dilution related to the two convertible issues. We anticipate depreciation, depletion and amortization of about $450 to $470 million.
And we expect CapEx to increase to a range of $1 to $1.1 billion with about a little less than a third of those going to sustaining and maintenance top up projects and a bit over two-thirds going towards growth. And of course, we’ve got the incremental impact of the sugar business in there now and the plans for that expansion as we go forward as well.
We’re maintaining the effective tax rate guidance range in 24% to 28% the same as it was in our last guidance and where we came out for 2007. So, with that I will open it up to Q&A.
Thank you very much.
Operator
(Operator Instructions) Our first question will come from Robert Moskow - Credit Suisse.
Robert Moskow - Credit Suisse
I think that the guidance for ‘08 is going to be a little bit lighter here than what a lot of people, including me, had been hoping for. But you did mention the fact that you are not forecasting any kind of benefit from potential dislocation of grain with the glut, this year or in ‘07 that we had in the U.S.
and deficits abroad. Can you give us any kind of quantification, it’s not really a fair question, but can you give us any kind of quantification as to how much ‘07 benefited from that dislocation?
Alberto Weisser
Rob, this is very difficult to estimate. But giving an anecdotal situation, we used to ship something like 500,000 tons to Spain normally.
Last year we were able with our network, with our logistic systems, with our origination, we were able to increase our business to 3.5 million tons. And we believe that most of that, we will be able to keep.
So we had similar situations like that in different parts in the Middle East. So it is very, very difficult to put an exact number on it.
And also, these kinds of dislocations happen from time to time. More or less you have it every year in one area or the other.
But last year obviously it benefited us with a large network of assets and the good infrastructure and logistics. It is very difficult to put a precise number on it.
Robert Moskow - Credit Suisse
And then in the fertilizer business, can you give us a sense of to what extent you are going to be able to pass through higher input prices for your blended fertilizer products to the farmers in Brazil? You have said that you expect margins to be smaller year-over-year.
But at the same time, the blended prices are so much higher than they were and then at the same time you want to be careful not to push the envelope too far. So what kind of a position are you taking here and how should we think about it?
Alberto Weisser
We went into 2007 with a better-input price structure than we are going into ‘08. So that is why we consider that we had a little bit more margins last year because of the good raw material input price structure.
This is one component. The second component you have to remember with the high petroleum prices, diesel went up.
Transportation is more expensive, so we estimate that for the Mato Grosso farmer, probably to cover all of the farmers’ costs. And the soybeans have to be around something like $7.50 per bushel, so it has gone up the breakeven for them.
So we have to careful. Also where the fertilizer prices are, they are expensive.
So we feel there is enough margins for the farmers, but we feel there is also pressure on all the raw material prices. So the petroleum prices had a very strong effect on all the input cost.
So the two components we have to be careful how it will evolve. It is very early.
I think the commodity prices should stay strong during the harvest of South America, but it is very early to say. The farmer will only decide planting the big crop in South America for soybeans, corn in June, July, August and we have to see where the commodity prices will be by that time.
Our estimate is they should be good. But we have to be careful here.
Robert Moskow - Credit Suisse
Yes, the futures market has soybeans closer to $13 a bushel, and you said $7.50 for a breakeven in Mato Grosso. I mean what is the farmer in Mato Grosso really getting today?
Are they getting $7.50 or are they getting something much higher?
Alberto Weisser
They are getting much higher. But you also have to take an average.
Some of them are already sold. Some didn’t sell, so you have to make a combined.
Those who are selling at the moment spot obviously are having a good price at the moment. But many sold before and many are going to sell a little bit later.
So you have to take an average. You are right.
The environment is very positive for the farmer.
Operator
Our next question will come from Christina McGlone - Deutsche Bank.
Christina McGlone - Deutsche Bank
Alberto, I guess following up on Rob’s questions. With respect to agribusiness, if I look at the opportunity in terms of dislocation it still exists.
So my question is, is there anything about your ability to capitalize on this opportunity that changes as we go from North America where the crop has pretty much been sold, to South America. I mean is your origination less robust in South America?
Is the crop availability different? I mean what changes now as we head to the South American harvest?
Alberto Weisser
The outlook for South America is positive. We believe the crops will be very good.
I have personally visited some of the areas; they look good. So we don’t expect any significant trouble from the South American crops in terms of availability and yield.
Now also we probably are better prepared. We have now the Santos terminal, [TGG] Intermark.
Our port in Argentina is better prepared. We have bought Socepar, the other port in Paranaguá.
So from an infrastructure, we are also better prepared this year than we were last year. So if the market gives us opportunities in Asia, in Europe to have a good flow, we should benefit from that.
But this is very, very difficult to plan. So we are planning more like a normal situation.
Christina McGlone - Deutsche Bank
So you are planning for normal, but with the weak crop in Europe not coming in until the middle of the year and China still short beans and soybean oil and you having the opportunity to execute on that demand, really I mean from what we see today, things shouldn’t change?
Alberto Weisser
We are optimistic. We’re clearly optimistic about ‘08 but you know how things can change very fast on a dime.
The plantings of soybeans were a little bit later last year than usual so the window for the winter corn crop the safrina has, normally its 21 days. It has been a little bit shorter.
So for the farmers to get it right on the winter corn crop there’s a little bit more risk. At the moment we see it very positively especially because probably the window closed for the cotton business, so there is a little bit more space for corn, but it can change at any moment.
So, it is very, very difficult in our business. It can change very fast.
Christina McGlone - Deutsche Bank
Then turning to fertilizer, I understand what you were saying in terms of the farmer, things getting expensive but there does seem to be some buffer between what the farmers in Mato Grosso are receiving even including the basis and what their break-even is? But then if you consider the fact that 30% of global phosphate production is in the hands of non-integrated fertilizer producers, wouldn’t you think that they would set the price.
And that higher phosphate prices, higher sulfur, higher ammonia prices would be passed through because they are not in that position to really eat those higher prices and then the global price of DAP, MAP, TSP etc., would increase?
Alberto Weisser
Yes, up to a limit, you’ll hear when you talk directly to the farmers like we do; they are really complaining. So, there is a limit how much the international prices can be passed on.
There will be a moment where the farmers probably will start cutting on technology. So, at the moment there is room for both for corn, for soybean.
But there is a limit. We have to be careful.
They are complaining very hard. And what we also have to remember is that the real has been stronger over the last three years but the inflation is continually going up.
So, there were personnel cost, the salaries are continue going up locally. So, when you think about it last year we were talking about full cost coverage for the farmer at $6 per bushel now we are talking about $7.50.
It is important so we only want to be cautious. The sky is not the limit here.
Christina McGlone - Deutsche Bank
Jackie, the CapEx guidance is significantly higher than you have been running. So, what is it that this means in terms of your cash flow generation next year and given the fact that working capital can still be onerous?
Jacqualyn Fouse
Well, I think, we’re seeing the degree of price increases not be quite as high probably when we look at the full year as we expected last year. So, the increase in working capital should be slowing down.
In terms of our business plans for 2008, we’re expecting to be more or less net cash flow neutral including funding those CapEx projects, and as I mentioned, sugar is completely incremental for us now. So, it has to be thought about in terms of the mix on a go-forward basis and I think we have always said that we have lots of opportunities more than we can avail ourselves.
And one of the reasons we did the mandatory deferred back in November, and we talked about it at the time, was to help us fund the expansion of sugar on a go-forward basis. So, now we are seeing that all come together and we would be able to digest all of this.
Christina McGlone - Deutsche Bank
How much of the $1 and $1.1 will be dedicated to sugar?
Alberto Weisser
Around $300 million
Operator
Our next question will come from Ken Zaslow - BMO Capital Markets.
Ken Zaslow - BMO Capital Markets
Not to harp on this question of opportunity, are you seeing the opportunities right now, in this quarter? Have they gone away?
Alberto Weisser
The exact opportunity we saw last year was the grain and the oilseeds, we don’t see. So, but obviously with a very high prices of grains the demand is strong for soybean meal.
We were a little bit surprised how strong the fourth quarter was for the oilseed distribution, meal oil as Jackie was saying. So, we continue seeing a very positive environment in the distribution oilseed processing, meal protein sales, and oil sales.
Ken Zaslow - BMO Capital Markets
And, I think it was like last April that there was an issue with the hedging between Brazil and the U.S. Is there something in these numbers that may not be operating that may come out throughout the year or is it not the case?
Alberto Weisser
As we said at that time, this kind of disconnection between the physical and the futures market happened all the time. It was very unusual last year because we didn’t have the physical demand.
So, we’ve to consider that these kinds of divergences will happen. But as we like to remind that when you look at the whole year like we always want to investors look at, it converged.
So, at the end we were able to deliver the products at the margins we wanted. So, the future market adjusted to the physical market or the physical to the future.
So, but we obviously cannot plan for a situation like that.
Ken Zaslow - BMO Capital Markets
But you don’t have anything like that right now? Everything is back to normal.
There is no issues at all because, as I think Rob asked, the guidance is a little bit lower than we would have expected as well, I didn’t know if there was anything in the guidance that was...?
Alberto Weisser
No, we are expecting traditional normal kind of an environment. And let’s say it; it is positive.
We should realize the high commodity prices are very good for our farmers and this is very positive for the fertilizer business. So, we see it for ‘08 and probably even for ‘09.
So, there is a structural change, which is positive and we have to remember we often forget that with global economy, the way it has been growing in the past, you have also smaller countries shifting their diet away from just cereals, carbohydrates, to consumption of more meat. And therefore, the demand for soybean meal and for oil vegetable has been higher.
In fact, even the demand in United States last year was up 2.7% in soybean meal versus normally that it has been around 1%. So, the demand picture is positive around the world.
Ken Zaslow - BMO Capital Markets
And in terms of recovering bad loan debt, from a couple of years back, to what extent do you think that there will be any recovery this year or will it still be in ‘09? How does that play out throughout the next 12 to 18 months?
Jacqualyn Fouse
Well, as you probably know, or can imagine, this is a process that probably moved a little bit slower than what we might like. So, it takes time, but what we are seeing is that we have been able to improve credit terms on our current sales.
We, actually, in terms of currency aside, we added a little bit less to the provision this year than last year and there was an impact from fairly from currency, though. We have recovered slightly more in 2007 then we did in 2006.
So, all the individual pieces of it looks like there are starting to be some degree of response but it takes a long time for this to work its way through the system. And those balances, which were the most significant ones, were incurred back in 2005, some of those have been renegotiated and some of them are in a legal status, which is going to take some time to recover those.
But we are not seeing anything wrong in that regard.
Ken Zaslow - BMO Capital Markets
When do you guys come up with guidance? Is it last week or is it two months ago?
Jacqualyn Fouse
Well, we look at this when we go through our business plan process in the latter part of the fourth quarter. And then obviously, given the number of moving parts in this business and how quickly things changes, we watch how we are finishing the year along the same time that we’re looking at what we think we’re going to have in our plans for 2008.
And we continue to do that as we start the year especially monitoring how things are going in South America. And so you can’t say that we just looked at it last week by any means because we have to start looking at it when we put our plans together in the latter part of the year before.
But we do try to reassess those plans and in light of how we finished the year and how we see the year starting.
Operator
And our next question will come from David Driscoll - Citi Investments.
David Driscoll - Citi Investments
Alberto, for a long time you have been very consistent in establishing a long-term algorithm. You established, I believe, it was the 2003 period as the base from which you believe that the company could grow its earnings 10% to 12%.
Can you update us today on where that base is? Obviously ‘07 is unlike anything we have ever seen before.
You gave us some ‘08 guidance, but I’d really appreciate your perspective on how to think about the company and the business over the long-term?
Alberto Weisser
Yes. Obviously, the company has changed a lot when you think about from ‘03 to today.
We have grown significantly and added segments and geographies and products. So, I think we have to look at a base for growth; it’s problematic calling one year a base.
But I’d consider the guidance of ‘08 for the bases of goals for these 10% to 12% EPS growth. You’re right like I often say from the 15 variables of our business in ‘07, 14.5 were aligned and we have to consider that in our business, in the commodity business, related to weather and climate and so on, often things are not exactly perfect.
So, ‘08 should be a good base.
David Driscoll - Citi Investments
In your 2008 earnings guidance, is the split in profit between agribusiness and fertilizers similar to 2007, would that be roughly accurate in assessing ‘08?
Jacqualyn Fouse
Roughly, I would say, although fertilizer had such a strong year in ‘07. You could see a little bit of a down movement in fertilizer and with the corresponding shifts I guess being in agribusiness.
Foods is a small piece of the total pie, so we know that it’s not going to move the needle massively, but we do expect the food business from a relative performance standpoint to be much higher in ‘08 than it was in ‘07 because ‘07 was such a difficult year.
David Driscoll - Citi Investments
There is just within the last eight or 9 weeks or so, we’ve seen a $250 per metric ton increase on gas and fertilizer prices internationally. This is an astounding increase in an incredibly short period of time.
Can you just explain a little bit more, why that fertilizer business wouldn’t see an enormous increase in profitability? Is it really simply the story on input costs?
Alberto Weisser
You have to remember that we have only the phosphate mines. We have small nitrogen business in fossil fuel.
But for us very important is the phosphate business. And we are ramping up every year a little bit more our production, but we are limited.
So, we had an increase of 10% in our production for this year. By the end of this year we will have a further increase, but we might not benefit so much because we have to import some of the products.
And the other margins, we don’t benefit exactly the same way when we don’t sell from our own mines.
David Driscoll - Citi Investments
Can you guys give us some specific volume numbers or volume projections, percentages, on fertilizer and agribusiness for ‘08?
Alberto Weisser
For the first time we perhaps are a little bit more optimistic than ANDA that is the Fertilizer Association in Brazil. We think probably it will be more like the 5% to 7% growth that we consider sustainable long-term growth rates, with perhaps a small potential for upside if the commodity prices stays strong.
David Driscoll - Citi Investments
That 5% to 7% was for fertilizer?
Alberto Weisser
Fertilizer growth vis-à-vis ‘07.
David Driscoll - Citi Investments
What about agribusiness?
Alberto Weisser
Agribusiness, we think more in case of Bunge is also the 6% to 8% growth rate.
David Driscoll - Citi Investments
Jacquie, can you give us guidance on interest expense?
Jacqualyn Fouse
Well, obviously we’ve benefited, or are benefiting due to the fact that rates have come down on the floating portion of our interest rate exposure. But because the working capital needs continue to stay high and they are a bit higher as of right now than they were in our forecast right around the end of the year, those two things may offset each other a little bit.
But depending on how working capital goes, otherwise maybe we could see a little bit of favorability in interest expense because of lower rates.
Operator
And our next question will come from Christine McCracken - Cleveland Research.
Christine McCracken - Cleveland Research
Just on your fertilizer business, not to focus too much because there has been a number of questions. But you clearly had a benefit this year from the increase in prices there as fertilizer prices continue to escalate through the most of the year until you sold it.
And I am wondering is it your view now at this level that prices have peaked. And so you are not going to see the same kind of benefit this year, or do you expect another leg-up in fertilizer prices assuming China comes in the next couple of months, for example?
Alberto Weisser
We don’t plan too much on, the way we are looking at it we don’t plan too much on further price increases. What we do see is a small contraction on our margins vis-à-vis ‘07.
I think there will be a point where the farmers will start reducing their demand if the prices get too high. You’ll start seeing them suffering because also the crop chemicals are up; transportation are up because of the increase in petroleum.
So, there is some pressure. We don’t see further increase.
Christine McCracken - Cleveland Research
And when we talk about your input costs, are you also referring to the increase of sulfur costs that you are seeing or is that a non-factor?
Alberto Weisser
Yes, yes, sulfur is a very important one. One of our main products we sell in South America is the SSP, which is phosphate and sulfur.
Christine McCracken - Cleveland Research
And it’s your expectation that prices are going to continue to go up there?
Alberto Weisser
We hope not, but they have been going up so. And we have to remember we have to re-negotiate the purchases during the year and so it worries us.
Christine McCracken - Cleveland Research
And then in terms of your [Zuanic airsha] expansion, and you talked about it coming on, I guess this year, I am wondering is that going to be a late 2008 event?
Alberto Weisser
No, the 10% happened, so it will be in ‘08, but the other increase will be only for 2009, the 30% increase of our [airsha].
Christine McCracken - Cleveland Research
In terms of the embargo that we’ve seen in some parts of the world, kind of, limiting some trade of commodities. Has that had any material impact on your business and especially at those port locations?
Alberto Weisser
It had. For example, we suffered a lot in Ukraine with the embargos.
We really suffered there not only from not having enough of the physical products, but also the products we had obviously to be sold at the lower value. But at the same time, these open up opportunities to export more wheat from U.S.
or from South America. So this is the beauty of being in many countries, many ports, many origins, and many destinations.
You can, what Jackie said, that these locations, they affect us in one area but can have a positive effect on other areas. So last year clearly, the U.S.
farmer benefited on wheat; the Russian farmer benefited on wheat; the Brazilian farmer benefited on corn. So, some of the farmers, and we were able to serve our customers, as I gave the example in Spain, very fast we were able to deliver and now we have very solid good new customers in some parts of the world.
Christine McCracken - Cleveland Research
It’s basically offsetting.
Alberto Weisser
The offset, yes, probably the offset last year has been more positive, but there obviously is some major trouble like Ukraine.
Christine McCracken - Cleveland Research
When you look at the outlook at least most analysts have for shifts in U.S. acres to soy, and you look at your overall business.
Do you view that as a net positive or do you not even agree with that outlook as you head into the next year?
Alberto Weisser
You mean in U.S.?
Christine McCracken - Cleveland Research
Yes.
Alberto Weisser
We are relatively neutral where our plans are. We see this as not affecting too much the net effect of perhaps having more or less soybeans; most of the time only affects the exports.
So, the shutting down of our Marks, Mississippi plant had nothing to do with the agricultural component there, but it’s more situation of the cost of that plant. And for U.S., I think we are well positioned that’s why you see we expanded our Council Bluffs, Iowa plant and reduced Marks and we expanded the canola plant in Canada.
Now net-net for Bunge it is probably positive these changes, because more of the expansion of soybeans have to come from South America, and there’s where we are well positioned.
Operator
And our next question will come from Diane Geissler - Merrill Lynch.
Diane Geissler - Merrill Lynch
When you sell the fertilizer to the farmer, does he have the choice to either pay the contract in cash or beans upfront? Or how does that work?
What’s behind the question is really we’ve seen soybean prices obviously move here pretty aggressively beginning in 2008. And I’m just wondering about his flexibility in terms of when the contract comes due, when he harvests, can he choose then to change his method of payment from beans to cash.
Alberto Weisser
Normally we have very long-term relationships with these farmers. We help them grow; expand, so there’s obviously a strong connection.
And the way it normally happens is that we finance them with a fertilizer. They commit to physically deliver and then either the prices are fixed earlier when he needs the money or not the prices are fixed later.
Now, normally the farmer doesn’t do these kind of transactions for 100% of their needs, because they obviously also want to have a little bit more flexibility if prices go up to fix the prices later. But the funding part of their working capital is so relevant the quid pro quo is that we get the beans.
Diane Geissler - Merrill Lynch
So you see very limited risk in terms of beans have moved forward that he’s going to change his mind and pay you in cash and then go in the market and sell at a higher price.
Alberto Weisser
It always happens here and there but it is de minimis. And obviously, this is something that we pay a lot of attention and where the long-term relationships do matter.
And often we have all our silos network so if the farmer doesn’t want to sell to us sometimes they have to drive quite a long way to the next silo. So there is a risk and we include this as part of our risk of our business and the same way we will also consider default on bad debt for the fertilizer sales but we include that in our outlooks.
Diane Geissler - Merrill Lynch
It seems like you’ve done a lot of work on the assets footprint this year and you’ve had some sort of extraordinary items run through with plant closures. Just keeping the gross CapEx kind of out of the picture and on your base infrastructure where you are right now is it kind of, where you wanted to be or do you see future plant closures, that kind of thing that we should be aware of?
Alberto Weisser
Not really, because we do a very thorough analysis, especially a systematic analysis doing the business plan. And when we see what we have to do we do it.
But at the same time, we have to be realistic. Five years ago, we didn’t see that Marks and Mississippi was an issue.
So, when you take a list of the 50-60 oil-processing facilities we have, you always have the best, and you always have the less best one and every year we look at some of them. I would not to be surprised that over the next five years, you would see one or two or three plants that we will shutdown around the world.
Now, at the moment, we clearly take the decision no for ‘08, ’09. We don’t see it, but it can happen.
And in Europe, you have seen a little bit more aggressive moves, because we had to redo our network in Spain, with shutting down four plants and rebuild two new ones. We have redone it in Poland.
We have redone it in Austria, also in Hungary. And the plan for Hungary and for Bulgaria and Romania, this is it.
We are building a new plant in Buzo and the ones we announced are shutdown. So, there is absolutely no new movement at the moment in that area.
Operator
And our next question will come from Vincent Andrews - Morgan Stanley.
Vincent Andrews - Morgan Stanley
What has to happen for commodity price volatility and supply dislocation to revert to normal levels during 2008? I guess from where we sit, looking at the global acreage battle between corn, soybeans and wheat, it seems likely to us that the status quo is going to persist.
Alberto Weisser
That is our estimate as well.
Vincent Andrews - Morgan Stanley
But why would, if you’re thinking of the world, when you’re looking at your plan and you are thinking about what could happen, I mean, how would soybeans get back to $10 a bushel this year?
Alberto Weisser
If they come back to $10 per bushel is not a problem, it’s very attractive. And what could happen is that we would have an outstanding yield in South America and a tremendous harvest and the harvest looks good.
But the ending stocks are still very low and you would still have to have a very strong U.S. crop as well and then the ending stock are still very low.
So, I will say there is always a risk, but that probably would mean in higher prices. And there would be an issue about availability.
Vincent Andrews - Morgan Stanley
Yes, wouldn’t want to argue if you had an outstanding soybean crops, that acreage would then go back to corn next year and then soybeans would have to really fight to get that acreage back? Isn’t that sort of what happened with corn this year in the U.S.?
Alberto Weisser
The price relationship between soybeans and corn, corn is favoring more the soybeans at the moment. It’s early to say but we probably will see that in U.S.
some there will be a little bit more plantings in soybeans this year than last year. But to your overall question, we don’t see too much of a change in the environment of commodity prices but we do think they will stay high this year.
Vincent Andrews - Morgan Stanley
Then 2007 was obviously an unprecedented operating environment and your performance was clearly excellent. But given that there was really no precedent for it, in assuming a similar environment on a go forward basis, are there things that you would do differently or don’t you think you could do better now that you have some experience in this environment under your belt?
Alberto Weisser
Oh, this is a tough question. I’m never happy; I would like to redo many things, do differently.
And we try to do it all the time and I do feel Vincent that we are better prepared this year than we were last year. I’m very pleased with the way we managed the working capital.
I give a lot of credit to the commercial team, the finance team, and everybody worked very hard together to reduce our cash cycle from 53 to 42. It’s quite something.
I’m very happy with that. At the same time our returns are higher so that was a very positive one.
What worries me obviously is the higher costs. There is inflation; the weaker dollar it affects us.
And I would have preferred to have this year also the same type of contract we had on sulfur but we don’t have it. But overall every year I think we are a little bit better prepared but also the environment changes.
Jacqualyn Fouse
Yes this is very macro, is we’ve got the last year was maybe the first full year under our belt with the expanded asset infrastructure and footprint and then really starting to focus on the whole value chain. So one can say that you start to build on the experience from that, so I think those are the things we would expect to be able to continue to do well as we’ve gotten that experience and seeing what we can do with it.
But as we’ve highlighted a number of times we do have still things that we’re cautious about while all the rest of that’s very positive.
Vincent Andrews - Morgan Stanley
I assume you have operating scenarios in your plan where the overall environment improves substantially and you therefore, soybeans for example were to go to $15 or $16 and the environment would change like that you know exactly what you want to do in that environment?
Alberto Weisser
Well we do it but this is we probably plan much more for the downside so that we are well prepared. If the upside happens we’re open for the upside.
But we focus much more on the risk side on the problems that could happen. So, I think we were well positioned to take advantage of the upside in ‘07.
Jacqualyn Fouse
You know something with asset efficiency plays into that too. Because if you do a good job with that then you can set yourself up to have the capacity to be able to take advantage of those opportunities as they present themselves, But from a planning standpoint even when we run scenarios, as we’ve said if somewhere between 11 and 15 out of the 15 things went right.
You are not going to run too many scenarios that assume that they all go right. You’re going to run more that include a mixture of things.
If we do a good job with all the rest of it then we set ourselves up to be able to take advantage of the things if they do all go right.
Vincent Andrews - Morgan Stanley
When was 11 the number for 2007?
Jacqualyn Fouse
I think that’s Alberto’s number.
Operator
And our next question will come from Pablo Zuanic - JP Morgan.
Pablo Zuanic - JP Morgan
Just want to make sure I understood the comment that was made on guidance. You were saying that the fertilizers segment of rating profit in absolute terms is going to be lower or did you say that as a percentage of segment operating profit is going to be lower?
Alberto Weisser
We feel that when you compare to ‘07 fertilizer should be a little bit lower. Food products should be much higher, although a small base and agribusiness more or less flat.
Pablo Zuanic - JP Morgan
Now just to understand that I mean given that it’s in dollars. If I think of three variables, volumes, absolute dollar prices, and cost.
Clearly you are guiding for a volume growth. We all see what’s been happening with prices, which obviously we are going to be up significantly year-on-year.
So, it is a cost side. But it just seems to me when we try to think about that in terms of the margins we are projecting, which obviously will be lower year-on-year, if I break out the business within the local component and the imported component the pressure has to be in the local component.
Because imported component is more of a wholesale trading business with relatively stable margins is that a fair analysis?
Alberto Weisser
I think we will see both the domestic and also the imported one slightly smaller margins. And, obviously, margins and industrial and SG&A expenses will be also higher.
Pablo Zuanic - JP Morgan
Okay and just to be clear regarding sulfur. I understand that the contracts are set every six months, so for example your next contract for sulfur would be set in April.
So what we have seen pretty much in the December quarter, in terms of cost, we should see in the March quarter. And then when you are setting the price in April for the next six months how quickly does that kick in?
So from looking at prices, spot prices for sulfur in April, that’s pretty, you’re your cost for the next six months? Or is there a lag in terms of how quickly that sets in?
Alberto Weisser
It is not much of a lag but you remember that when you look at our business in fertilizer the first half is something like one-third and the second half is two-third, so it will be a very critical negotiation, the April one.
Pablo Zuanic - JP Morgan
Structurally the fact you have the OCP joint venture in Morocco, and the fact that you are expanding your local mine, isn’t that structurally going to help margins? And related to that, if you can briefly comment, why margins in your fertilizer business are so much lower than what we see for other fertilizer companies?
What do you see structurally for the setup of your business that would justify Bunge’s margins being so much lower?
Alberto Weisser
I think the big differences is we have a relatively large retail business, and a retail business, which is a lot of volume and smaller margins, makes the average look lower. So, on the nutrient side, we are probably comparable and perhaps we are slightly advantaged because of the location where we are.
And but the retail business when we sold the NPK a good portion of that is imported so that is why the overall average of our fertilizer margin looks smaller.
Pablo Zuanic - JP Morgan
Did the joint venture in Morocco and the expansion in the local mines isn’t that structurally going to help margins? Or is it not about that, it is just about having more fertilizers available?
Alberto Weisser
It’s more of fertilizers available. We will have an advantage on participating on that infrastructure, but we don’t benefit from the ownership of the mines.
The mines continue to be owned by OCP.
Pablo Zuanic - JP Morgan
When you look at your fertilizer volumes in 2007, would you say that you actually gained share? And if you gained share how does that compare to the rest of the market?
And why did you gain share as opposed to your being more cautious on the credit front?
Alberto Weisser
We probably lost a little bit of market share, we were more careful on the credit side.
Pablo Zuanic - JP Morgan
I know you don’t breakdown within the business your earning from oilseed crushing and agricultural services. I mean Archer Daniels does that, but you guys don’t do that.
But when I look at the year-on-year earnings growth in 2007, roughly 90% comes from the agricultural services side and 10% from the crushing side? I mean, any color there would help to understand the growth that we saw in that business in ‘07.
Alberto Weisser
Yes, as Jacquie was saying, we look at the business in a value chain. You have the origination, you have logistics, you have the processing, and then you have the distribution.
We don’t see it as meaningful to separate the chain. So for us it is very important to look at one and it moves around.
We indicated that the distribution and the grain origination performed quite well, and the middle piece or the processing part was better than in ‘06 but not significantly, so the crushing margins were good. So it is very difficult, we don’t see it as meaningful as separating.
We don’t do it exactly like that internally so we also don’t do it externally.
Pablo Zuanic - JP Morgan
Just trying to understand this issue on the dislocation argument, I mean, the example that you gave about Spain, which obviously is anecdotal, we are just trying to understand. Do you say that Spain actually imported more than normal, or do you see that you had people on the ground and you have the connections now?
That infrastructure that you didn’t have before, that allows you to benefit from that. So I am just trying to understand how much is it of each?
Alberto Weisser
We are the largest player in selling soybean meal to the livestock industry. And their traditional suppliers of the grain were unable to get it, smaller players, and local ones.
And that they did not have the infrastructure that we have to bring it in either from South America or from North America. So we knew we were very close to the customers and we saw their need.
So we were able to jump in and immediately deliver that so.
Pablo Zuanic - JP Morgan
Why were the guys not able supply that, why what was the problem for them?
Alberto Weisser
They don’t have the same global network of origination, they don’t have the bold infrastructure, and they don’t have the logistics. So in that one-year they didn’t have the origination of that grain.
Pablo Zuanic - JP Morgan
And there is no reason to think that that will change, right?
Alberto Weisser
Normally you keep these kind of customers but over time if the markets get completely normal, you get again some competition from the smaller players.
Operator
And our last question will be a follow-up question and that question will come from David Driscoll.
David Driscoll - Citi Investments
Alberto, there is been a lot of debate about what is the long-term sustainable price for crops. Certainly the large cap food, the branded food manufacturers.
They frankly outlined a view that there is just a long-term inflation in the crops. Do you share that opinion or do you hold to a thesis of mean reversion with crop prices eventually going back to where they came from?
What’s your thought process, any color here would be helpful?
Alberto Weisser
We believe that the prices changed structurally to a higher level and the main reason is the higher energy prices. The energy components in crops are very relevant.
Its transportation, its crop chemicals, its fertilizer, transportation. So there is a stronger correlation nowadays between the energy prices and food.
So we have done long, very thorough analysis especially on the sugar and ethanol component. And you see that the kind of green-field investments you have to do in that business, it is at the higher level that it used to be.
And especially, because the global trade has increased and the prices have to be determined on the low level cost operators, and the lower cost regions. As you see more and more expansions coming from both soybeans, corn, and also sugar from, let’s say, in case of Brazil its in the interior.
There is a longer transportation to the ports. So the prices have to be higher.
David Driscoll - Citi Investments
Then, just kind of marrying on to this discussion, when you look at or think about acreage expansion in Brazil in the coming one or two or three years. And you have argued for a long time that the available acreage there was absolutely tremendous.
Given just where prices are, as of yesterday, for corn, soy and wheat, etc., would it not stand a reason that that new acreage, even with the higher transportation costs to the coast, would still be something that would put pressure on prices over the long-term?
Alberto Weisser
Yes, probably they would not stay where they are now. They would come down but not to the 50 years mean that everybody is talking about like the $0.09 sugar, the $5.50 soybeans.
I don’t think we will see that coming back. But what you’re seeing more instead of opening new areas in Brazil, what you are seeing is conversion of pasture.
You will see more and more conversion of pasture to agriculture, and not so far in the interior to avoid the logistics expenses.
Mark Haden
Well thank you everyone for joining our call, we’ll see you next quarter.