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Bunge Limited (NYSE:BG)

Q4 2012 Earnings Call

February 07, 2013 10:00 am ET

Executives

Mark Haden

Alberto Weisser - Chairman and Chief Executive Officer

Andrew J. Burke - Chief Financial Officer and Global Operational Excellence Officer

Soren W. Schroder - Chief Executive Officer of Bunge North America

Analysts

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

Kenneth B. Zaslow - BMO Capital Markets U.S.

David Driscoll - Citigroup Inc, Research Division

Diane Geissler - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Giovana Araujo - Itaú Corretora de Valores S.A., Research Division

Operator

Welcome to the Fourth Quarter 2012 Bunge Earnings Conference Call. My name is Ellen, and I will 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 Mark Haden, Investor Relations. Mr. Haden, you may begin.

Mark Haden

Thank you, Ellen and thank you, everyone, for joining us this morning. Welcome to Bunge Limited Fourth 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 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; Drew Burke, Bunge's Chief Financial Officer; and Soren Schroder, CEO of Bunge North America. I'll now turn the call over to Alberto.

Alberto Weisser

Good morning, everyone. Let me start by addressing the news of our leadership transition, which we announced this morning and is effective on June 1. I will then provide some insight into our results. Drew will provide details on the notable items, the quarter and our outlook. And Soren will say a few words and we will transition to Q&A.

This transition is a very positive step for Bunge. With Soren, we have a great leader who has built a track record of success in various roles within Bunge. He helped build our global marketing and trading unit, established our Agribusiness franchise in Europe and the Middle East, and since 2010, has led one of our largest operating companies, Bunge North America. In this role, he has overseen the full breadth of our oilseed and grain value chains. In addition, he has deep understanding of our industry, markets and customers. He lives on our business, having spent his entire professional life in it. For all of these reasons, he has my full confidence and that of the board. Soren's selection is the combination of a deliberate and thoughtful process. We have a robust and ongoing succession plan in process at Bunge for the CEO and other management positions. The board and I started working on this particular issue a couple of years ago and established a specific board committee last year to manage the final steps. As part of the process, we have allowed the time and resources to ensure a smooth transition.

For the next 4 months, I will continue as CEO and Soren will focus on running Bunge North America. During that time, Soren will gain exposure to additional parts of the business and meet with employees around the world. As investors, you will see more of him as well. In the second half of the year, I will serve as Executive Chairman, and in this role, my priority will be ensuring that Soren has what he needs to succeed. I will be there to provide support, input and perspective.

So in short, this is the right choice at the right time. That is true for Bunge and for me personally. 2013 is my 15th year as Chairman and CEO. That's a good number. It's right time for me to move on and to hand the reins to the next generation of leaders in our company.

Now let me touch upon the quarter and the year. As mentioned, 2012 ended weaker than we expected, but looking at the full year, we had a record performance in Agribusiness and very solid results in Food & Ingredients. We believe both of these businesses are very well positioned for continued growth and positive returns. We are confident in the long-term potential of Sugar & Bioenergy as well. Clearly, this business is not producing the results we expect or demand. Poor weather conditions and low Brazilian ethanol margins continue to be a challenge. That said, we are making progress to realize the full earnings and returns potential of this business.

Our primary goal is to lower unit production costs. Increasing capacity utilization is a big part. Last year, we reached our planting target of nearly 70,000 hectares, which should allow us to operate at full capacity in 2013. We are making operational improvements to lower costs as well. This include improving industrial planting and harvesting efficiency. Lastly, increases in yield of both cane and ATR, from the low levels seen today throughout the industry will also benefit margins. In fact, I would like to remind that in 2011 and 2012, these yields, both tons per hectare and ATR, were the lowest in the last 20 years.

2012 was also a year in which we improved our portfolio. We took the important strategic step of agreeing to sell our Brazilian fertilizer business for $750 million. We will continue to provide fertilizer to farmers as part of our grain origination program. This will be a streamlined activity with lower price risk that acts as a strong complement for Agribusiness operations. We also made important investments in key markets, including India, Mexico and Africa, among others. Looking to 2013, we see a robust Agribusiness environment. Demand remains strong and farmers are working hard to rebuild stocks. Forecasts call for record harvests in, and strong export flows from, South America. In this environment, we expect Bunge's asset network and team will provide compelling service to farmers and customers and produce strong results. We also expect a strong year in Food & Ingredients, building on the momentum of the latter half of 2012.

As you saw, the fourth quarter also contains several notable accounting adjustments. Drew will tell you about them in more detail, but let me make 2 points. First, goodwill write-down in Sugar & Bioenergy is the result of our annual impairment test. It's a noncash and does not change in any way our positive view of this business or its potential. Second, the charges in Fertilizer are part of the divestiture of this business. We expect some offset later this year in addition to the cash gain when we close the transaction.

I will now turn the call over to Drew, who will provide greater detail on the quarter and our outlook.

Andrew J. Burke

Thank you, Alberto. Our results in the fourth quarter include noncash after-tax charges of $683 million. The major components of these charges are shown on Slide 3. Our Sugar & Bioenergy business, we have recorded an after-tax goodwill impairment charge of $327 million as a result of our annual goodwill impairment test according with U.S. Generally Accepted Accounting Principles, which is based on the fair market value of the business on the test date. At the test date, the sugar industry was under pressure from the effects of adverse weather and low ethanol margins, and merger and acquisition activity was low, making it difficult to benchmark business values. Given that, it was prudent to conduct the Step 2 testing required by the accounting standard. That standard requires you to perform acquisition accounting based on the current fair value of your assets and liabilities. Replacement value of our assets has increased significantly, so the calculation resulted in the impairment of our goodwill.

While the value of our agricultural and industrial assets has increased, we cannot recognize this increase in value of the assets for accounting purposes. We continue to believe in the future of our Sugar & Bioenergy business and our ability to create significant shareholder value. We have made the necessary investments in sugarcane planting to allow us to run the plants at full capacity. We continue to expand our production capabilities at our current facilities, increase our agricultural industrial productivity and invest in cogeneration. The recent policy and pricing moves in Brazil is supportive to our business, and we believe pricing will continue to strengthen.

During the fourth quarter, we signed an agreement to sell our Fertilizer business to Yara for $750 million. Accordingly, the results of our Brazilian fertilizer operation are shown as discontinued operations and the assets of that business are classified as assets held for sale. In the fourth quarter, we recorded 2 charges related to this business. We recorded a valuation allowance of $266 million on the deferred tax assets related to our net operating loss carryforward, as our ability to use these losses is uncertain because of our exit from the retail industry in Brazil. We also recorded a $32 million after-tax provision against our long-term farmer account receivables balance, as we believe the sale of our business will negatively impact our ability to collect those amounts as many of these receivables are with farmers who grow crops that we do not handle in our Agribusiness operations. We expect the transaction to close in mid- to late 2013, and we expect to record a gain on the sale.

During December 2012 and January 2013, we sold certain long-term tax and legal claims in Brazil for approximately $91 million in cash. And in relation to these sales, we recorded a loss in the fourth quarter of $73 million, and we will record a gain of approximately $60 million in the first quarter of 2013.

Let's turn to Page 4. Total segment EBIT for the quarter is a loss of $414 million. When you add back the impact of certain gains and charges, total segment EBIT was a profit of $149 million versus a prior-year EBIT of $295 million. A complete list of the gains and charges is shown in the schedules attached to our press release. On a full-year basis, adjusted segment EBIT was $1.1 billion versus the prior year of $1.15 billion.

Agribusiness recorded an adjusted quarterly EBIT of $134 million versus $199 million in the prior year. Volumes in the quarter were slightly lower, reflecting the drought's impact on North American grain volumes and South American oilseed processing volumes. For the full year, our volumes increased 13%, primarily reflecting higher grain export volumes from the Black Sea region and our new terminal in the Pacific Northwest.

North American [indiscernible] processing had a strong quarter. These results were offset by lower oilseed processing results in our European soft seed and Asian businesses. Our grain trading and merchandising business benefited from export programs out of South America and Eastern Europe. Our North American Grains business performed slightly better than the prior year, but came in below our expectations due to lower export volumes and margins. In general, risk management performed below expectations in the quarter.

On a full-year basis, Agribusiness reported a record adjusted EBIT of $1,038,000,000. Full year's results were driven by strong performance in our grain and merchandising business, as our full value chain approach worked well. Strong South American grain origination, coupled with a global distribution network, drew strong volumes and margins. Oilseed processing performed well in North and South America, while soft seed processing results in Europe were lower.

Sugar & Bioenergy reported an adjusted EBIT loss of $49 million in the quarter versus the prior-year EBIT profit of $3 million. The loss reflects the continuing impact of the weather on total recoverable sugars and the fact that hydrous ethanol margins were negative in the quarter. Our sugar planting program for 2012 was successfully completed, and we plan to have sufficient cane available to crush at our full capacity in the 2013 crop year. Our productivity programs continues to achieve positive results, as shown by a 15% decline in our unit production costs during the fourth quarter. Results were also impacted by weakness on our trading and merchandising and North American ethanol businesses.

On a full-year basis, our Sugar & Bioenergy business recorded an adjustment EBIT loss of $118 million. This reflects the impact of reduced total recoverable sugars on our revenues and costs, and depressed ethanol margins in our industrial business and low margins in our trading and merchandising business. We crushed approximately 17 million tons during the year versus our capacity of 21 million tons. As previously mentioned, we expect that sufficient cane available to crush at our 21 million-ton capacity next year.

Our Food business reported an adjusted EBIT of $49 million. Within that result are provisions related to Brazil value-added taxes of $22 million. If you add that back, you come to a profit of 72 -- $71 million, which is in line with prior year and our expectations. Our edible oils and wheat milling businesses performed well in the quarter, while corn and rice milling results were below prior year. On a year-to-date basis, our Food & Ingredients business reported an adjusted EBIT of $166 million versus a prior year of $235 million. The shortfall was primarily due to low results in Brazil in the first half of the year related to challenges within ERP system implementation that resulted in lost sales opportunities. Those issues are behind us and those businesses performed better in the second half. Our adjusted earnings per share for the quarter was $0.57 versus $1.80 in the prior year. On a full year basis, adjusted earnings per share was $4.62 versus $5.96 in the prior year.

Let's turn to Page 5 and the cash flow summary. Our cash flow provided by operating activities in the quarter was $2.4 billion, comprised of funds from operations of $161 million and an inflow of $2.3 billion from changes in operating assets and liabilities. Funds from operations are primarily comprised of our net income, excluding the noncash charges, and depreciation and amortization. The change in operating assets and liabilities primarily reflects lower inventory levels and commodity prices.

On a full-year basis, cash used by operating activities was $455 million, comprised of an inflow of $1.1 billion from funds from operations, offset by an outflow of $1.6 billion from changes in operating assets and liabilities. The increase in operating assets and liabilities is mainly due to the increasing commodity prices between year end 2011 and 2012. Our capital spending for 2012 was $1.1 billion and in line with our plan.

Let's turn to Page 6 and the balance sheet. Our balance sheet and available liquidity remains strong. The working capital increase primarily reflects an increase in inventories due to higher commodity prices. The higher debt levels are primarily due to the higher working capital balances. At December 31, we had $3.4 billion of liquidity available under our committed credit facilities.

Let's turn to Page 7 and the outlook for 2013. We expect a stronger performance in 2013. In Agribusiness, the market is anticipating record crops in South America, and they are needed to rebuild global supplies. Our strong position in these markets, particularly our logistic import networks, will allow us to source increased volumes and distribute them through our global network. The main South American export season will be from March to September. After that time, new crop will become available in North America and Europe and trade is expected to shift to these regions. As the new crop is harvested, we expect good South American oilseed processing volumes and margins. Both domestic and export demand should be strong. Near-term margins in North American are good, but they will weaken as oilseed supplies decline and the South American harvest commences. We expect stronger margins, again, in the latter part of the year, with the arrival of the new crop.

In Europe, margins are mixed. Rapeseed margins have improved while sunseed margins have weakened. Asia margins improved towards year end and demand for meal is strong.

Please turn to Page 8. In Sugar & Bioenergy, we expect to see significant improvement. Our 2012 planting program was successful, and we are now in a position to operate our plants at their full capacity of 21 million metric tons of cane. Our productivity improvement programs are yielding positive results, and we should see a further 15% reduction on our unit costs in 2013, and we expect to see continued productivity improvements into 2014. We also expect that total recoverable sugar in the cane to move back towards historical norms. This would have a positive impact on both revenues and costs. The remaining headwind is the ethanol price and its impact on margins. On this front, we are encouraged by the recent developments in the Brazilian ethanol market. The blend rate of anhydrous ethanol into gasoline will increase from 20% to 25% on May 1. This should increase demand for a profitable product, and we have taken the necessary steps to be able to supply higher quantities. Additionally, the gasoline price in Brazil has increased approximately 6%. This results in increased ethanol prices and is a move towards bringing Brazilian gasoline prices in line with global gasoline prices.

Given the above, we expect our Sugar & Bioenergy business to be solidly profitable in 2013. However, to achieve our target of $8 to $10 EBIT per ton of cane crushed, we need to see prices increase to levels that reflect global gasoline parity on ethanol.

To summarize, we are continuing to accomplish the actions that are under our control. We are planting sufficient cane or have planted sufficient cane, to operate at capacity. We're moving towards higher value products. We're increasing our productivity, and we're adding cogeneration capacity. Carrying these improvements through to 2014, along with the 10% to 15% increase in ethanol pricing, should enable us to achieve our financial targets.

We would also like to note that the sugarcane milling business is seasonal and the profits will be weighted toward the second half of the year. In Food & Ingredients, we expect the performance in the second half of 2012 to carry into 2013. Our underlying edible oils and milling businesses should perform well, with increased contribution from our wheat milling acquisition in Mexico and our edible oils acquisition in India. We will be starting up a new multi-oil refining facility in India and a new refining and packaging facility in Alabama. We will be also be starting up our new crushing and refining facility in Altona, Canada, which will benefit both our Food and Agribusiness operations.

We will have continuing operations in Fertilizer, comprised of our Argentine fertilizer business, our port operation in Brazil and our Moroccan joint venture. We expect these businesses to be profitable.

Turning to Page 9, we would like to note that we expect 2013 depreciation, depletion and amortization to be $575 million, our full-year tax rate to be between 17% and 20%, and capital expenditures of $1.2 billion.

I would now like to turn the call over to Soren for a few words.

Soren W. Schroder

Thank you, Drew. Alberto summed it up well. We're optimistic about our performance going forward, and he and I are committed to working together for a smooth transition. It's truly an honor to be selected as the next CEO of Bunge, and I approach the job with great humility and optimism. The future is bright, and we have a lot of work to do. Fortunately, I'll have the benefit of an outstanding global management team and the dedication of 35,000 Bunge employees around the world.

Following Alberto requires stepping into big shoes and is also a great opportunity. His 20 years at Bunge, first as CFO and as Chairman and CEO, has literally transformed the company. When he started, Bunge was a regional conglomerate. And today, we are a leading, global, focused ag and food company with an unique culture and an approach that Alberto fostered. This was no small feat. It required vision, determination, judgment and great leadership, all of which Alberto has in quantity. It was the reason why I was attracted to Bunge when I joined 13 years ago.

So we stand on a solid foundation with an excellent team, leading positions in key markets and a strong financial situation. I look forward to building on that foundation and guiding Bunge to its next era of growth and success. So Mark, with that, will you take us through the Q&A?

Mark Haden

Yes, Ellen, could you please open the phones to questions?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ryan Oksenhendler with Bank of America Merrill Lynch.

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

Could we talk about, I guess, what happened in the quarter in Agribusiness, just starting on the oilseed side, on the processing side? You stated in the prepared remarks that North America, South America were offset by lower Asia and Europe processing results. Now when I look at your capacity, North America and South America dwarfed Asia and Europe and when I look at the margins in North America particularly, you had $0.80 crush margins versus $0.40 a year ago. You had the highest utilization rates in years. What happened there that the profitability wasn't that much better?

Alberto Weisser

I would say that Europe and Asia is relevant. It's probably around 40% of our processing capacity now. We have been expanding it, and we had particular issues in 1 or 2 areas. And in rapeseeds, we had some issues, especially in Germany, and also on sunseeds in Eastern Europe. And China was tough. At the end of the quarter, it improved, but overall, the comparison versus last year, versus '11, was negative. And in South America, obviously, it's the end of the season, so it's comparable to the way we performed in '11. So in North America, we have more or less 35% of our processing is North America. That was not enough to make the big jump that we needed.

Ryan Oksenhendler - BofA Merrill Lynch, Research Division

Okay. And then on the risk management side, where you said the strategy there were not as profitable as expected, could you be a little more specific? Was it something to do with logistics, with the Mississippi? Were you buying beans, I guess, over the summer before you saw the crop come in bigger than expected? Can you give us a little bit more detail around that and whether or not any of those issues will impact or flow into the first half of the year?

Alberto Weisser

Look, first of all, what happened in the fourth quarter stays in the fourth quarter. So it was a reasonable quarter, but it was not as good as we hoped. Let's not forget it was a record year in Agribusiness. Now what did not work so well for us was that we, similar to what we did in South America, we geared up ourselves for a very tight situation, very tight markets in North America that ended up not being so tight. So we probably had more inventory and more positioning that do not -- did not work so well, so -- but that's part of our business. I feel very good about it, the way we have performed, a record year, and from time to time, we will not get it perfectly and has absolutely nothing to do with '13. '13 we look at extremely positive.

Operator

The next question comes from Ken Zaslow with Bank of Montréal.

Kenneth B. Zaslow - BMO Capital Markets U.S.

So [indiscernible], how much was the risk management loss?

Alberto Weisser

It was not a loss. It was -- obviously, we have a very large infrastructure, and we have a lot of costs, but we did not generate the margins that we expected to generate.

Kenneth B. Zaslow - BMO Capital Markets U.S.

Could you put some context on what you would have generated if you were on the -- give us some context to it.

Alberto Weisser

It's very difficult to say. We thought it would be a much stronger one. I think also in addition, we probably had a little bit more trouble with the grain business. We have to remember that the farmers -- as prices started to come down, farmers were more reluctant sellers so margins was squeezed as well. There were also some logistic issues. So not everything worked that well.

Kenneth B. Zaslow - BMO Capital Markets U.S.

Okay, and then can you talk about the outlook for each of the regions on the crush margins? Like which -- where do you think that there'll be the greatest improvement in margins throughout the year? And where would you think that there might be a little bit more risk in the margin structure going forward?

Alberto Weisser

We believe that we will see an improvement. The South American crush margins should be very strong. We are looking at a very, very large crop, and we think we are very well positioned. We also expect a very strong fourth quarter this year in the Northern Hemisphere. We believe that we will see a better soft seed crop in Europe. So overall, we look at a positive environment. The first quarter will be a little bit softer because obviously, it's the end of the North American season and at the same time, we also see improvement in the processing margins in Asia.

Kenneth B. Zaslow - BMO Capital Markets U.S.

Okay. And then in terms of the Sugar business, what exactly are we rooting for in terms of -- do we want a big crop so we have a lot of volume or do you want a smaller crop so you actually have higher prices? And if you can kind of do that, and I don't know if, Soren, you want to actually comment on your position on the Sugar business, not that it [indiscernible] clear, but what your position is over time. It seems like this business is abundantly struggling every year.

Alberto Weisser

I would not see it like that, Ken, because you have to remember a couple of things. First, let's deal with what we can deal with internally, and that is, get the costs right. So we have reduced in '12, the costs already, the unit cost by 15%. This year, we will reduce it another 15%, next year, in '14, something 5% to 10%. So we can -- more than half of the issues we have to get to our targets, we can solve it internally. If you have 2 years in a row, '11, '12, with the lowest yields in tons per hectare and sugar content in 20 years, it's very tough to get the volumes through your plants. And therefore, we can't utilize our capacity. So in addition, just think about if we run at capacity, we are talking about 3 to 4 million tons more processing of sugarcane. At a contribution of 40 million tons, it gives you an idea. It is not possible to make money in an environment when you are not running close to capacity. So we have to see this year. This year will be key and obviously, we're optimistic. Having said that, it is obviously also important that prices are right. So we know that the, as Drew mentioned, ethanol prices are below what they need to be, especially hydrous. We have increased our anhydrous production this year by 60%, so nearly half of our ethanol will be anhydrous. That's profitable. Sugar also needs to be a little bit higher, so that is why we have this excess production, especially adding from Asia and we should -- we expect that during the year, we should slowly seeing a reduction in inventory. And therefore, prices should also come up in sugar. Therefore, we need a more -- when you look at it all -- when you put it all together, we will get to our target margins mostly by reducing our own cost, but we do need some 15% higher prices in ethanol. Soren, do you want to add one comment?

Soren W. Schroder

I'm optimistic about 2013. I confirm what you said. It's the first year, really, in the last 2 or 3, but we have a chance to prove that our asset footprint in Brazil, with a good crop, can yield results. And several factors are moving in the right direction.

Operator

The next question comes from David Driscoll with Citi Research.

David Driscoll - Citigroup Inc, Research Division

Want to touch on a few points. You've already commented a little bit on this, but Alberto, first, you said, maybe I take a little bit of an issue with your comment that you felt the quarter was reasonable. Given the setup for the quarter and even given your comments back in October, then I feel like this quarter was a flat-out disappointment relative to the Bunge that I've known since you came public. And the risk management here seems to be the issue. I agree with your comment on the full-year basis that it did well, but looking at ADMs and cargo results, I mean, the results from Bunge today are much, much weaker in Agribusiness than anything we would have thought. And again, just going back to your own comments in October, I don't -- it doesn't seem to me like it's reasonable to point at crushing margins in other regions, that it's got to be risk management that was the culprit. I'd like you to make a comment on that one and then critically, just talk about how that then affects 2013, because so many people who invest in your stock, they get so worried about this risk management issue and that from one quarter to the next, people have a hard time having any visibility on it. So I really think you need to provide some comfort and context around what this means for '13.

Alberto Weisser

First, perhaps the comment about crushing was not precise from my side. On OPD, on oilseed processing, we did better in '12 than we did in '11. So I was just qualifying that we did not do much better, because we have large footprint in Asia and South America didn't contribute much, and we had some issues in Europe. But overall, oilseed processing was better. Areas where we did not do well, and I agree with you, Dave, it was not a good quarter in Agribusiness. It was in grains in North America, because of the issues of the crop, but also in risk management. Now having said that, I'm very, very proud and very comfortable with the way we approach it. And our risk management has shown over the years, over the last 6 years, it is rock solid. Now you can't get it always right. There are so many moving pieces. We are talking with weather. We are talking about all kind of different things. We got it absolutely right in South America. So when you look at, on average on the year, we did well. It was a record year. Quarter, okay, I'm also upset. It was not what it was supposed to be.

David Driscoll - Citigroup Inc, Research Division

And then can you make that comment, though, about 2013, the implications from the fourth quarter rolling into '13? Do you have visibility that your risk management strategies are going to already, right now here in February, they are already back on track and producing the results that we would otherwise expect from the very tight crop environment?

Alberto Weisser

Absolutely. I think this issue was more related with the month of October and I feel very, very comfortable. This is, in the quarter stays in the quarter. I think the way we are looking at 2013, as we said it in different ways, we look at it very optimistically.

David Driscoll - Citigroup Inc, Research Division

One more question, if I may, very important. Drew, can you comment on your ability to achieve your cost of capital in 2013 given the environment that you've laid it out for us? That's always helpful and you've often in the past made those comments. Can you update us?

Andrew J. Burke

I would be happy to, Dave. I think when you look at our agriculture -- Agribusiness and Foods and look at those 2, we'll be above cost of capital. I think yet in '13, Sugar will not be at a point where it's above cost of capital. And that will probably take out to 2015 to get there at our current projections. So we see a steady ramp-up towards cost of capital for Sugar, but not yet in '13.

David Driscoll - Citigroup Inc, Research Division

But given the size of Sugar versus all the other 2 businesses, it would sound to me like then the whole, entire business is right there, right at cost of capital.

Andrew J. Burke

It's right around cost of capital.

Operator

The next question comes from Diane Geissler with CLSA.

Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division

I wanted to ask on Sugar and your comments about to reach your normalized range of $8 to $10 a ton, you merely needed to see a little bit more pricing coming from the gasoline market, and I'm assuming that's the ethanol market. Can you talk a little bit about, if prices sort of stay where they are today, and I appreciate we'll see an increase in blend rates in May, but if things sort of stayed where they are today, where do you think that margin would come out for 2013 based on your expectations of 21 million metric tons? And then also on the Sugar business, could you comment a little bit about your expectations? You replanted a lot this past year and the year before. So agronomically, what are you doing with your current acreage base and are you increasing that for 2014? I'm just trying to get an idea of where that business goes from a volume perspective over the next couple of years.

Alberto Weisser

Okay. In terms of what we need, in terms of pricing, today, hydrous ethanol, which is half of the ethanol we sell, is negative. So what we need is that the gasoline prices in Brazil go up. They don't need to go all the way to international parity. But they need to probably go up something like 15% to 20% hydrous. Anhydrous is okay. Obviously, cogeneration is okay and sugar prices need to be a little bit higher as we expect them to go -- to get to our target margins. But the real issue is hydrous margin. And what we are doing is, obviously, all what we can to reduce our unit cost, and we mentioned 15% last year, 15% this year and 5% to 10% next year. So more than half of the problem we will solve ourselves, but we will need to get to the target margins. We need an uplift from the gasoline prices and therefore, also the hydrous ethanol prices. Now what is happening is that, in Brazil, is that the industry is shifting to -- sugar is shifting to anhydrous and exporting. Brazil exported 3 billion liters last year. So who is taking the burden of solving the problem in Brazil is Petrobras. You have been seeing the kind of losses they are taking because as the millers are not producing more hydrous ethanol and there's less and less, Petrobras has to import more and more gasoline. And they are losing probably something like $0.20 per liter on each of these transactions. So I think it is very clear to the Brazilian government now that it is in the interest of Petrobras, of the country, that we need higher prices to solve this gap. Brazil probably needs something like 20 billion to 30 billion liters until 2020, and that is going to be served, either through hydrous and anhydrous ethanol, or it will be import gasoline. So the situation is pretty clear of which direction to go. And we see very clear signs that the government is going in the direction of allowing the prices to go up. So we are reasonably optimistic. This change with a mandate to May 1 to anhydrous, the increase in gasoline prices, are all indications already. Regarding the planting is the heavy lifting is done. So with the 70,000 hectares that we planted in '12, the catch-up is done. So we will obviously have to continue improving it. So this year's program is 60,000 hectares planting. So we will need to invest less money in '13. What we want to do is always have something like 10% more than what we need in case of weather issues that normally happen. So from now on, the increase in planting will be in line with our expansions of our mills. So we have learned our lesson. We will do first the planting and then expand the mills.

Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division

Okay, so just on the normalized margin then on a per-ton basis, if you don't get the pricing this year, where -- how much below the low end of the normalized range do you think you might be?

Alberto Weisser

Drew, come to the rescue.

Andrew J. Burke

I think, Diane, we've gone through this the last couple of years, and we learned that there's a lot of variability in that number depending on weather and what happens in the pricing environment. We will have a very clear, or not a very clear, but a much clearer view on the crop and the quality of the crop as far as the sugar content, in the spring, when we start to run the plants again, and I think we would want to wait to that time before we would give a precise estimate, I think what we would say today is we do expect to be profitable, but we won't get to the $8 a ton.

Alberto Weisser

Diane, also for the first time, we can say the weather has been right for the last couple of months. So after so many -- now, we had probably 24 months where everything was wrong. The last 6 months have been -- the weather has been right.

Operator

Our next question is from Ann Duignan with JPMorgan.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Can you address the logistics and port issues that you might anticipate given the record crop we anticipate in Brazil and other regions? Is there any risk that we have a record crop, but we can't get it to market?

Alberto Weisser

I think there will be issues. The crop is going to be a record crop. And we believe there will be issues, both in ports and on the rails, but also especially in the inland logistic, and will create some issues. But let me tell you, we feel quite strong the way we have positioned ourselves. Remember that Bunge, we have an origination program and logistics program and merchandising program that is larger than the second and third competitors combined. And we have done a lot. In ports, we operate 11 terminals in 8 ports. We have made -- prepared ourself for this year with expansion in storage, inland storage. We have worked very hard to improve efficiencies in the ports. We hope we have the right contracts. I think this is a little bit of a situation that will be trouble and unfortunately, who pays for the trouble? Normally is the farmer. But it's also a question of how well you are prepared vis–à–vis the rest of the industry. And we have focused all our attentions to get it right.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

If you had to rank trucking, rail or port, rank order where you see the biggest risks, would it be on the trucking side, just getting the crop to the port, or do you think bigger risk is actually getting the crop out of the ports?

Alberto Weisser

Trucking is the biggest risk. That's also one of the reasons we have expanded our storage, which means that first we want to get it to the storage and let the peak freight rates of the harvest pass, and then at lower rates, move it to the ports.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

Okay, and then as a follow-up, could you address -- you noted that you had some problems with rapeseed in Germany. Is that related to the European Union's change in biofuel standards or was it just a once-off? If you could just give us some...

Alberto Weisser

No, it is much more a localized issue. Size of crop, margins, it is -- that was the issue. It's much more localized, competition.

Ann P. Duignan - JP Morgan Chase & Co, Research Division

And do you expect that to improve going forward or is that something that will overhang...

Alberto Weisser

Yes, we expect '13 to be better, both in sunseeds and in rapeseed. The whole soft seed sector should be better in Europe.

Operator

The next question is from Tim Tiberio with Miller Tabak.

Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

Last quarter, Alberto, you had stated that you didn't think that low palm oil prices would have much of an impact across the overall oilseed complex. I'm just wondering, based on your comments around some of the underperformance in Asia, whether that kind of developed the opposite direction over the last few months. Is that some of the problem there or is there something else going on that we should be aware of?

Alberto Weisser

The issue in Asia is that we have excess capacity, processing capacity in China. So the margins have been tight. We have -- that was the issue in the fourth quarter. So we have, in previous quarters, we have sailed relatively well through it because of our extremely well-located plants and rightsize and low cost, but we were not immune in the fourth quarter. Now margins have improved at the end of the quarter. But it's not related to palm oil. It's really a competition, overcapacity situation in China.

Tim J. Tiberio - Miller Tabak + Co., LLC, Research Division

Okay. And as far as, I guess, corn supply right now in Brazil, how is that looking, towards the end of the current season? Is availability really tightening up from your perspective?

Alberto Weisser

We are in the middle of the crop and soon, we will have the softening [ph] of the winter crop. So I think we are going to see very large, a very, very large harvest in South America, especially in Brazil.

Operator

Our next question is from Robert Moskow with Crédit Suisse.

Robert Moskow - Crédit Suisse AG, Research Division

I did want to ask you, though, about your comment on risk management. You said that over the last 6 years, you think risk management's been rock solid. We tend to put a lot of focus on the missteps more than the successes, and I just wanted to know what kind of process do you have internally to kind of go back and see the decisions that were made, what was the rationale for making them? And then maybe comparing versus your peers, over those 6 years, here's how we did versus our peers.

Alberto Weisser

I feel very, very comfortable, Rob, how we compare vis–à–vis the competition. And now, you have to look at it always on an annual basis because there are so many moving parts. These are millions and millions of contracts. There are millions of tons that are moved. And all the time, things change. Look, I think we all came in, including the USDA, with a view of how the harvest would be, but we were surprised how much better it was, especially in soybeans, than we thought it would be. So I think we have an extremely robust process internally of how we do this and how we look at it, very strong research, very -- a lot of significant -- this is extremely institutionalized. We are nearly 200 years old, and we have been doing this for a long period of time. So I feel very strong about it. When you look at our volatility of our earnings in Agribusiness in over the last 6 years, it is not a lot. So you have sometimes quarters where you don't get it exactly right. But I feel very good about it the whole year and I feel also very good about the whole team. Now have we made a mistake? Yes. Have we learned from it? Yes. Are we going to come stronger out of it? Yes. So I hate to see the way we did it in the fourth quarter, but I feel very good about next year, about -- I mean, about '13.

Robert Moskow - Crédit Suisse AG, Research Division

I appreciate the comments. And just a question on the balance sheet. Debt levels are over $1 billion higher than they were last year. I imagine that's partly due to readily marketable inventories being higher as well. Can we expect 2013, all else being equal, to be a positive cash flow year?

Andrew J. Burke

The tricky part of your question, Rob, is all other things being equal. If all other things are being equal, we'll have a little bit of business growth. So some of our balances would go up, but I would think our earnings growth would offset it. So I think your comment is fair. The problem is we're very influenced both by what commodity prices are and what the structure of pricing is in the commodity market, how much of a carry or an inverse you may have in the market. But if we assume that's all the same, I think your comment is very fair that it would be positive. And that's what we plan for. We plan for, actually, for neutral cash flow after investing.

Robert Moskow - Crédit Suisse AG, Research Division

And Drew, the cash would go towards debt reduction, the excess cash, if there is some?

Andrew J. Burke

If it's the case of us freeing up working capital, that's what we do with it, yes. And separately, we look at new investments we want to make, but it is not driven by changes in commodity prices, and those shifts in working capital levels and debt levels, how much we feel we have for investment, will be determined based on our long-term outlook for cash flows and our overall balance sheet position.

Operator

The next question is from Giovana Araujo from Itaú BBA.

Giovana Araujo - Itaú Corretora de Valores S.A., Research Division

My first question was about logistics. Alberto already addressed it perfectly well. So my second question is about risk management. And so basically, I would like -- if you can comment, Alberto, how challenging is to do the risk management if the market's more on a spot basis, and how challenging is it to do the risk management in a market that is no longer in a carry situation?

Alberto Weisser

I would say in the spot market, there is no risk management, but -- because you buy and sell. But overall, it doesn't matter if it's in a carry or inverse. Risk management, that's exactly the science to manage it correctly so that we serve our customers right, let the volumes continue growing and make money. That's exactly what we know how to do. So we don't mind if it is -- how the structure is of the futures. And also, if it's a large crop or short crop. Obviously, you saw we got it right in the South American crop. We didn't get it so right in the Northern Hemisphere crop. But in the year, we did very well, it was a record year.

Operator

That is all the time we have for questions today. I would now like to turn the call back over to Mark Haden for closing marks.

Mark Haden

Great. Thank you, Ellen, and thank you, everyone, for joining us this morning.

Operator

Thank you, ladies and gentlemen. This concludes the Fourth Quarter 2012 Bunge Earnings Conference Call. Thank you for participating. You may now disconnect.

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