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Bunge Limited (NYSE:BG)

February 20, 2013 3:00 pm ET

Executives

Alberto Weisser - Chairman and Chief Executive Officer

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

Raul Padilla - Managing Director of Bunge Global Agribusiness and Chief Executive Officer of Bunge Product Lines

D. Benedict Pearcy - Chief Development Officer and Managing Director of Sugar & Bioenergy

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

Analysts

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

Robert Moskow - Crédit Suisse AG, Research Division

Ian Horowitz - Rafferty Capital Markets, LLC, Research Division

Unknown Executive

Okay, if I could ask you to please take your seats for our next presenter. Thank you.

So on behalf of the CAGNY board, I want to thank Bunge for presenting at CAGNY this year, and for generously sponsoring what I hear is going to be a very lavish dinner on Thursday. So thank you very much to the Bunge management team.

Bunge is a vertically integrated global agribusiness company whose roots go back almost 200 years. Here on stage with us today is CEO, Alberto Weisser and his management team. Over the past 14 years, Alberto has lead the company's transition from a privately-owned, family-controlled conglomerate to a pure-play agribusiness company with a clear vision for growth.

Alberto announced his retirement recently, so this will be his last presentation in the CEO role at Bunge. COO Soren Schroder has been announced as his successor and he's also presenting today. And on behalf of CAGNY, I want thank you so much for your support over the years, Alberto, and wish you well in your next endeavor. Your company operates in a very volatile environment but your calm and genial manner made it easy for us to get to know you over the years and gain a deep understanding of Bunge's strategy.

So without further ado, here is Alberto Weisser.

Alberto Weisser

Thank you, Rob, for the nice words. Thank you, everyone and good afternoon. Thanks for being here.

As we proceed, please consider the content of the Safe Harbor statement which is shown here. This is our second time at CAGNY, and we are very pleased to be here again. Today, we will have a presentation from Soren Schroder, who will become CEO of Bunge in June when I retire, as well as presentations from Raul Padilla and Ben Pearcy who lead our Agribusiness and Sugar & Bioenergy segments, and a financial review from Drew Burke, our CFO. Finally, we will close the day with a Q&A session.

For the benefit of those of you who are not as familiar with us, let me speak for a few moments about who we are and what we do. Bunge is a global leader in agribusiness and food. And while we only became a publicly traded company on the New York Stock Exchange in 2001, Bunge has a long 195-year history. This timeline shows you key milestones in our development since our founding in Amsterdam in 1818.

We have operations in all the major crop production and consumption markets around the world, with more than 400 facilities in over 40 countries. Our Agribusiness, Sugar & Bioenergy and then Food & Ingredients segments each benefit from leading positions in their respective markets. And our Fertilizer business is becoming a more streamlined complement to our Agribusiness operations with lower price risk and operating costs due to the recently announced sale of our Brazilian business to Yara. We expect that transaction to close in the second half of this year.

Now to describe what we do, Bunge brings food from where it is grown to where it is needed. We buy, sell, store and transport crops, process them to make them for feed for animals, staple foods and ingredients and other products. And we partner with farmers providing fertilizer know-how to help them produce larger and better harvests. We also make renewable fuels that have less impact on the environment. This slide shows you the range of commodities we handle.

Today, our global asset network is broad and balanced with strong positions in the Americas and Europe, as well as a growing presence in Asia. Our strategy consists of 3 pillars. First, strengthening our leadership positions in core businesses. In Agribusiness, we are optimizing our oilseed value chain and building share in growth markets. We are also expanding our share of grain trade and making improvements to our asset network. This includes adding new facilities, expanding existing facilities and closing less efficient ones.

In Sugar & Bioenergy, we are seeking to achieve best-in-class performance in our mills through improved efficiency, as well as increased scale and capabilities. The returns in these segments have not met expectations, and we are intensely focused on improving our revenue stream and lowering unit costs. We are also building relationships with tech providers in the fuel and biochemical industry.

And in Food & Ingredients, we are strengthening our global platforms in edible oils and grains to extract more value from the chain, building relationships with key global customers and leveraging innovation across regions and channels.

Second, expanding into adjacent businesses where we can leverage our essential capabilities to succeed in new product areas, new geographies or in places where we can extend value chains. For example, last year, we extend -- we entered the wheat milling industry in Mexico, which is an extension of our milling operations in Brazil and U.S.

And third, focusing on operational excellence. Life in the commodities business after all is about managing low margins. Many years ago, we started a robust productivity improvement process in our industrial areas. Since then, we have expanded our efforts into procurement, SG&A and logistics to drive continuous improvement throughout the company.

So I have 3 messages for you today about Bunge that you will hear throughout the presentation. We are in attractive markets with long-term growth potential, and we have the right capabilities to capitalize on them. We have a clear plan to continue to grow and improve our returns, and we have confidence in our ability to manage today's and future market environments.

I'm going to turn over to Soren, who currently leads Bunge North America and will become CEO of Bunge in June. He will walk you through the drivers of our business and our approach in more detail. Soren?

Soren W. Schroder

Thank you, Alberto, and good afternoon, everybody. It's a pleasure to be here today and to have the opportunity to present to you a few thoughts on why we are so excited about the industry in which we operate and also why Bunge's approach is special.

We're clearly in a growth business, there can be no doubt about it. A lot of it is driven by demographics and income growth trends. The mere fact that by 2050, there'll be 2 billion more people on the planet needing to eat and consume, all of them in developing countries, is a driver. The trend towards more urbanization is another very important one. Today, roughly 50% of the world's population lives in urban areas; by 2050, it will be 70%. That clearly changes the way people consume, not only the quantity but also how they consume, all favorable to the consumption of basic food ingredients. And then finally, income growth, between now and 2020, so over the next 7 or 8 years, there'll be 1.3 billion more consumers in the income bracket above $5,000 per year. That happens to be the sweet spot where changes in income really makes a difference in how much more people consume of basic food.

All of this leads to growth and demand for basic agricultural commodities. It's kind of obvious, but it also leads to significant increase in global trade. In fact, global trade, which Raul will talk about in a little bit, in relative terms, is growing even faster than overall global demand growth. That all speaks to Bunge's strength in many ways. We do believe that we're experts in managing physical flows. In fact, the over 100 million tons of basic raw material that we transport from farms to basic logistics and immediate processing and to destinations around the world and domestic markets, really, is at the heart and center of what we do. Within that, many of our risk strategies are born and are executed. For example, bridging the timing gaps between when the farmer wants to sell and when an overseas or domestic consumer wants to price, is not always easy. They typically have opposing views, although they both want the same, which is to secure margin. So finding out ways in which we can bridge that timing gap through intelligent use of risk management tools and economic analysis is at the core of it.

Being involved in physical flows around the world gives us a good insight also to when shifts in global trade take place, and they frequently do. Look at the last 5 or 6 years. Every year we've had several shifts, major shifts, from one region of the world to the other one. We can anticipate that by being close to our customers, thereby helping us supply them under almost any circumstance, but obviously also, in the process, reading the impact on capacity utilization in those regions of the world that receive the trade flows.

We understand our customers very well, whether that's the farmer, through his economic -- agronomic choices, what he plants, how, when and why. But also downstream customers around the world, be it in the feed or in the food business, it all helps us understand the real drivers of the economics behind our business. It helps us serve customers, it helps us read markets. All of this is held together by a very, very strong segment which Raul is leading in Agribusiness, a strong global product line management and a system of economic analysis and risk management that I believe really is at the best level in the industry. I've been around for a while in agribusiness and I really feel that what Bunge has developed over the last 12 years is something quite special.

Our food business, an important part of our portfolio as well, is built on the strength of agribusiness, is built on the strength of the upstream, really starting at the farm level. The role of food in Bunge's portfolio is to deliver continued steady growth, reduce volatility in earnings and I believe that we can do more than what we have. Our focus in food really is on 2 integrated chains. One is the oilseed value chain and the other one is the edible grains chain, from grains to milling. In both cases, our customer is absolutely in focus and by us operating these chains as one integrated whole, our customers really get the best of what the market has to offer, competitively priced products, traceability all the way through the chain, the ability to even grow specialty crops for special use, competitive products that are safe and affordable.

Our food business has also been the springboard for many adjacencies over the last few years. Alberto mentioned a couple. I've been involved in a few in North America over the last 2 or 3 years, one was our entry into the rice milling business which is an easy and obvious adjacency to our corn milling business, many of the same customers, similar technologies. And as Alberto mentioned, wheat milling in Mexico which we entered in a meaningful way last year and we intend to grow. So our feed food business is an interesting add-on to our agribusiness upstream strength and I think our customers around the world see that, that integrated approach to managing how we serve them is very valuable.

Over the last 5 years, Bunge has built a strong presence in the sugar and bioethanol business, particularly in Brazil. We have a strong competitive platform today. I think it's fair to say that we've grown strong during challenging times. We've got 21 million tons of cane crushing capacity today. It will grow over time. We have a highly efficient footprint in mills, modern and efficient. We've got a flexible product outflow, whether that is anhydrous or hydrous ethanol, whether it's VHP sugar for export, Crystal sugar for the domestic market and also adding on new value -- added-value streams such as revenues from coal generation and also added-value products that use the sugar as a feedstock. We feel very good about where we are. Also very important to know that 70% of the cane that Bunge uses in its mills comes from our own plantation. So we are large-scale farmers. Ben will talk about that in more detail later on, but we've invested a lot in the last few years in improving that capability, clearly being good farmers in this area is a key to success.

In addition to this, we built a global trading franchise, very much like we had in agribusiness over the last few years that connects origin to destination. It is the eyes of our sugar world to the world, understands trends and changes in trade flows and the economic analysis that go behind that which allows us to manage risk better for the integrated chain. I'm a strong believer in Bunge's strategy in sugar in Brazil and I'm sure that this will be the year where we start showing the potential.

Finally, and this is very important, Bunge is a special place. We are a pretty fantastic mix of cultures and values and backgrounds. I don't know of any other company in our business that is as diverse as we are. All of it is held together by some very strong values, the Bunge values, teamwork, openness and trust. The belief that the individual makes a difference, the creativity, at any level, very important, entrepreneurship is one of our strong values but all of it held together by a very strong segment and product line leadership and common purpose. It is an exciting place to work from any [indiscernible] and the reason that we continue to attract so many talented people around the world. So the global trends are clearly favorable. We've got great teams globally. We've got a very strong and, I think, committed customer base, which we appreciate, and we got a very competitive footprint. That's the reason why I'm so excited about the next stages of Bunge's growth.

So with that, I'm going to turn it over to Raul Padilla, who's going to take you through our Agribusiness strategy. Raul?

Raul Padilla

Thank you, Soren, and good afternoon to everyone. My name is Raul Padilla. I'm the Managing Director of Bunge Global Agribusiness and the CEO of Bunge Product Lines. I oversee our business globally, including strategy and capital investments, and, along with my colleagues who run our regional business, our day-to-day commercial and risk management decisions.

I'm going to start discussing the environment in which we have been operating. This slide show you the dramatic production shortfalls we have seen in the past 18 months. In corn, the current and previous U.S. crops are well over 100 million tons lower than what they could have been assuming trendline growth in production. And in soya, if you consider the last 3 crops production, it's about 35 million tons below trendline. Just to put this in perspective, total global trade in corn is about 100 million tons and soybean is 90 million tons. So these are significant reductions.

Of course, the combination of lower supply and relatively inelastic demand drives price higher and increases volatility, which we are seeing today. So what happens in our market when crops are smaller and prices increase?

First, traditional trade flows shift as the market adjusts to new level of supply and demand. For example, looking back to the past 4 years, we have seen significant weather-related crop shortfalls in each of the world's major production areas. In 2009, a drought in Argentina result in a lower year-over-year soy export from South America, a reduction that was met by increased exports from North America.

In 2010, all the major grain origin rushed to compensate the dramatically lower grain exports from the Black Sea. In 2011, the Black Sea and South America came to the rescue when the U.S. corn production fell. And most recently, in 2012, South America again stepped into being the world supplier of corn and filled the gap resulting from the significantly smaller level of production in the U.S. And as the small U.S. stocks are being a drawdown, particularly in soybeans, world demand is shifting back to South America, which is on track to deliver a record level of production. What is important to note is that trade is vital [ph] and it's ensured a market for farmers who have supply to meeting the needs of customer who don't and providing confidence for nations.

When crops are smaller and prices increase, customers also shifted to higher cost products for more readily available and cheaper ingredients. This chart shows you hypothetical feed formulation for the same animal. As you can see, the options include very different protein and energy ingredients. As such, livestock producers have a great deal of flexibility when developing feed rations, and they are very responsive to the relative price of ingredients.

To be successful in this environment requires several things. First, a global asset network. Second, a diverse product portfolio. And as you can see from this chart, Bunge has both. We operate in 6 continents, our processing and full capacity is distributed well among major productions and consumption regions, and we have handled a variety of oilseeds and grains. This attributes mean that we can confidently supply customers with the products they need when they need them, participate fully in shifting trade flows and manage volatility.

So let me do a quick summary. Global supplies are tight, price volatility will continue until stocks are replenished to comfortable level, the market is responding, farmers are increasing production. South America exports will play a vital role in meeting global demand for the next 6 or 7 months, at which time the Northern Hemisphere will become the world supplier. As a result, we expect our asset network from elevators to export terminal to see a high utilization. We're confident Bunge is well prepared for this environment.

And we are confident that we have the right team for this environment as well. Among the top 14 managers in our Agribusiness segment, which would include myself and our regional and product line directors, we have well over 300 years of collective industry experience and over 200 years of service at Bunge. Unfortunately, I count for more than 10% of those 30 years. The average tenure at Bunge is long as well, 16 years. At least here, I'm right on the average. Though talent senior executives are only 1 part of the puzzle, you also need a strong bench, and that starts with good recruiting and training. About 5 years ago, we started a commodity training program that draws talent graduated from top universities. They spent 18 months in assignments around the global operations, learning the skill and perspective necessary to be outstanding traders and commercial managers. It's a long-term investment, but the one that we made confidence in.

Now let's look ahead. I like to turn to a key idea that was introduced earlier, a large global population living better and consuming more high-value food. What are some of the specific drivers that -- and what is the potential?

Basically, when people have more money and when they leave agricultural life for a new form of employment, their diets change. They reduce the amount of calories attained from cereals, in favor of calories from meat. They also add more fat to their diet in the form of edible oils, either by using them to prepare foods or at home or by consuming more packaged food and restaurant meals. In the case of oils and meat proteins, there is still long way to go before people in the developing nations reach consumption at levels on par with the U.S. and EU. As people add more meat to their diets, they trend to favor white meat, increasing their consumption of chicken and pork. This is particularly beneficial for growth in higher-protein feeds ingredients like soybean meal, which form a large share of the ratio for these animals.

Importantly, to meet this shift in consumer diets in the developing world, trade will have to increase at faster average annual rate than production and demand, driven by discrepancies among region and available land and water. A few regions will play an important role and will expand their share of crop productions. For example, the U.S., South America and Black Sea will account for the majority of the growth in corn, wheat and soy production in the next 10 years. The trends are clear, and so is Bunge agribusiness' strategy. Our plan is to build up on the strong foundations we have in our core oilseed and grain business by expanding in key geographies and optimizing our presence globally. We will also expand into adjacent business by adding new products to our portfolio and by extending our value chains into sectors like feed milling. And in addition to strengthening our team, we will work to improve continuously our operations, logistics and risk management.

In the case of oilseed processing, a big part of our strategy is putting the right assets in the right places. We have expanded our canola processing capacity in Canada so we can participate fully in the growth in demand for this crop, and we recently formed 2 joint ventures. One, that combines our Romanian operations with Prio Foods and create a leading enterprise with over 1 million tons of salt sea processing capacity. Romania is a key part of our large Eastern European presence. And another that is building a new soy grass plant in Paraguay. Paraguay is a fast-growing origin and produce high protein soybean meal that is very popular in Asia and Middle East markets. What these projects show is that building on our core operation does not always mean going alone. In some markets, like Canada, we believe the right approach is with our own facilities. In other markets, it makes sense to partner.

In grains, our strategy has been to increase our share of total trade. This has meant increasing our origination and core capacity. Two key projects have been new grain terminals in the Pacific Northwest and the Black Sea. Together, they expand our export capacity by millions of tons per year and enable us to participate fully in key trade flows. Looking ahead, we expect to increase our activity in Australia, which is a key exporter of wheat. We have been running a good business there for several years, utilizing public logistics assets and now we are actively working on ways to build the dedicated assets necessary to replicate down under the business we have in the Americas and in Europe.

We are also excited about sub-Saharan Africa. This is a region in which we are growing our presence rapidly. We have formally expanded our joint venture with Senwes, which originally focused on South Africa to Kenya, Mozambique, Zambia and Malawi. These are markets where a joint venture is the perfect approach. In this case, Senwes, one of the African largest grain and oilseed handlers, brings outstanding local knowledge and Bunge brings connectivity to the world. Together, we aim to build a powerful business that serves both regional and global markets.

The opportunity is clear. By 2050, more than half of the population of sub-Saharan Africa will be living in cities. This urban consumer class will be an engine for demand growth in our markets. In fact, the continent's projects food consumption growth rate is twice that of the developed countries. And Africa has the land and water to be a major producer of oilseed and grains and with the right investment, a significant exporter. And our joint venture in Indonesia is Bunge's first step in building an upstream presence in palm oil and an example of our entry into adjacent business. It is really a natural feed [ph] through which we can leverage our core capabilities and experience in a complementary value chain. It's also an important step in diversifying our product portfolio. Today, palm oil represents over 30% of the world's total vegetable oil production and enjoy a strong growth rate of nearly 5%.

So in conclusion, we believe that we have built a strong foundation for continued success, global asset networks, diverse product portfolio, a strong balance sheet and an outstanding team. The long-term growth potential of our industry is clear and compelling, and we have a proven strategy that we are very confident will enable Bunge to continue its track record of solid performance.

Thank you, and with that, I invite Ben.

D. Benedict Pearcy

Thank you, Raul. My name is Ben Pearcy, I head Bunge's Sugar & Bioenergy segments.

We believe the opportunity in Sugar & Bioenergy is compelling. This is a business that leverages our core capabilities and risk management, operating in Brazil, and logistics. We think the long-term dry [ph] demand potential is very significant and we like the optionality between different products. We also think there's an opportunity to build a global leadership position in what is an emerging new market.

Our strategy is clear. The first stage is to build a leading position in the Brazilian cane milling business and to establish a leading position in sugar and ethanol merchandising. As a second stage, we'd like to take our business outside of Brazil and to create global relationships with the technology and fuel industry. Brazil is the largest sugarcane producer in the world and is responsible for over 50% of the world's sugar exports.

Soren earlier on walked you through our asset base today. I'd just like to remind you that from our sugar mills, of the 21 million tons of cane, we have 3 main product streams. We can make sugar, we make ethanol and we generate power by burning the bagasse. You can see here that our mix is about 41% sugar, 59% ethanol. That's assuming that we maximize sugar. We have the ability to swing production and can actually increase our ethanol to 65% of the mix in response to prices, so we have a lot of real optionality in our assets.

This is an agricultural business. About 70% of our costs are in the agricultural area. A large part of that cost is fixed cost. For example, the leases on land, which we grow sugarcane on, the equipment required to plant, to harvest, to transport the sugarcane. So fundamental for us in this business is the yield we achieve per hectare of land. That dilutes costs and also drives the amount of product we have to sell.

The other factor that plays into this, we have yield per hectare plus the sugar content of the cane itself. As you can see here, we've had some very severe challenges in the last 2 years. When you put these 2 factors together, cane per hectare and sugar contents, which is a term ATR, which is the amount of sugar per ton of cane, you get the amount of sugars per hectare of land. You can see here that in the last 2 years, we've had exceptionally low amount of sugar per hectare versus historical averages. The main factor here was weather. We saw a severe drought at the end of 2010 in Brazil, which impacted cane. Cane is a multiyear crop. You plant it and you harvest it for 7 years, so the 2010 drought had a knock-on into future years. It also then, combined with adverse weather conditions in 2011 and 2012. So we faced a very a severe challenge in one of the most fundamental aspects of our business, which is the agricultural area.

We expect to see a recovery in 2013 as I will show you in the coming slides. The other challenge that we faced is in the Brazilian fuel markets. Ethanol as a fuel, about 50% of the cars in Brazil are now flex fuels, so the driver can choose whether to put in gasoline or to put in ethanol. Effectively, ethanol prices itself off gasoline at the pump in Brazil. The Brazilian government controls the gasoline price at the refinery, so they set the price at which Petrobras can sell gasoline. That price has not been changed for 5 years despite changes in the international energy market. Ethanol prices itself had a maximum of 70% of the gasoline price. So the unchanged gasoline price at the refinery sets the ethanol price. So producers in Brazil of ethanol haven't been able to capture or recapture the cost increases they faced. Early in February, we saw the first move in 5 years from the Brazilian government, they announced an increase in prices of 6.6% of the gasoline price at the pump. We think that's very positive for the future of this business.

How are we responding in the face of 2 very significant challenges? We're driving for best-in-class performance at our mills. We believe that our footprint has a number of strategic advantages. Our mills are located in the right areas with low land leasing costs. We have a cluster of assets to support each other. And we also have a low radius for transporting cane to our mills. What we're working on at the moment is improving agronomics, selecting the right cane varieties, replanting, investing in irrigation, fertilization. At an operational level, it's all about equipment maintenance, the speed at which we can harvest and industrial yields. There's a tremendous amount of work going in our Brazilian operations to improve efficiency and get to best-in-class performance.

We have invested very aggressively in replanting cane. You can see here over the last 5 years, our cane planting program. Last year, we planted 68,000 hectares of cane. We expect to plant another 66,000 hectares. We expect this to ramp down as we get to capacity in our sugar mills.

Planting is fundamental to drive the recovery of yields and you can see here the drop in yields between 2010 and 2011. We expect this year yields to start moving towards more normalized levels. Normalized historical yields are about 85 tons per hectare. We expect over time to move back toward that level of yields driven by our planting program.

You can see as a result of the lack of sugarcane in 2010 and 2011, our sugar mills operated significantly below capacity. In a fixed cost business, that destroys your economics. In 2012, we increased our crush by 20% to 17 million tons, but we're still below capacity. In 2013, for the first time, we expect to crush at capacity, and in 2014, to match our cane with our capacity increases. One thing that we will be very careful to do in the future is to make sure we have sufficient cane to give us a buffer against adverse weather events and also to make sure that cane planting is running ahead of capacity increases.

If you focus on the bottom part of the chart here, this increase in cane yields is allowing us to reduce our cost between 2012 and 2013. We expect our cost per ton of cane to drop by about 10% from $56 a ton down to $51 a ton. When you factor in also an anticipated increase in the sugar content of the cane, we expect our cost of sugar to reduce about 15% from just over $0.19 a pound down to just below $0.17 a pound, a very significant improvement in our cost structure.

If we look a little bit further forward, our focus is really on expanding the existing sugar mills. We have 8 sugar mills. We're going to expand them to their full potential. There's a tremendous amount of leverage in scaling up, in adding cogeneration and improving the product mix, increasing the yields per hectare. The yellow line here, you can see here's the cogeneration and that you can see we expect to increase our cogeneration more than fivefold to 2020. I like to go into the cogeneration a little bit more deeply here. You can see here that we're showing our cogeneration volume and our cogeneration revenues. We have 2 major cogeneration projects coming onstream. One in the mid-year this year and the second one early next year. You can see that, that will double our cogeneration revenue next year in 2014 and have a significant impact on revenues. Even beyond this level, we see the potential to triple cogeneration at our existing mills, just by taking them up to their maximum potential. At the same time, we're improving not just total volume. You can see here between 2012 and 2014, we expect to increase our volume of production by 30%. At the same time, we're working to improve the mix of products. An important area of focus for us has been to increase proportion of anhydrous ethanol. We expect to increase that by 60% this year relative to last year. Also investing in producing more crystal sugar. So we'd like to have more ability to diversify our revenue streams and reduce our reliance on hydrous ethanol.

So when we combine improved productivity, improved agricultural costs, we are moving towards our target of $8 to $10 of EBIT per ton. If we look little bit further forward, we see additional opportunities to improve productivity in areas such as the radius of cane, the yield per ton, the operational effectiveness of our mills and our agricultural equipment. Also as we expand cogeneration, we see the opportunity to take our margins to $15 to $19 a ton.

If we turn to the demand side of the business, ethanol is really driven today by the Brazilian domestic fuel market. You can see that Brazil has seen a tremendous growth in the number of cars on the road in the last years, and within that a tremendous growth in number of flex-fuel cars. Today, over 50% of cars are flex-fuel. That's expected to increase to 70% by 2015. Brazilian fuel demand increased 7% last year and it's anticipated to increase another 7% this year.

When we dig in and look at the fuel mix on the left-hand side of this chart, you can see that, that increase in fuel demand has not been met by ethanol. It's been met by more gasoline production in Brazil and, in fact, by gasoline imports by Petrobras. So Petrobras is importing gasoline at world prices and selling at fixed domestic prices. They're losing about $0.20 a liter. So last year, Petrobras lost over $600 million importing gasoline. Should roll this forward, in 2015 and 2020, we see a tremendous growth in Brazilian fuel consumption. Domestic refining capacity is not going to keep pace with that. So the Brazilian government needs to provide an economic signal to expand ethanol production. In fact, Petrobras' CEO came out and made the same statements in last year. We see the recent increase in the price of gasoline and the return of blending to 25% as signals that this -- the government recognizes the challenge.

On a global basis, the world continues to see increases in blending mandates in different countries. Energy security is a driver, environmental issues are a driver. Another interesting driver is ethanol is an excellent substitute for MTBE as an oxygenate/octane enhancer. Brazil is very well positioned to benefit. Brazilian cane ethanol has the lowest greenhouse gas profile of any bio-fuel, between 60% and 90%, depending on how it's calculated. Last year, Brazil exported 3 million cubic meters of ethanol of which 2.5 million cubic meters went to the United States. The balance went to Asia, the Middle East and Europe. So we see a continuing pull for ethanol exports from Brazil. If we turn to the power markets, Brazilian power demand is also expected to grow. You can see the bars here showing the power supply in Brazil. Brazil depends overwhelmingly for its power and hydroelectric power. There are more environmental constraints in Brazil on the size of reservoirs. Cogeneration from cane to gas has a number of advantages for power supply. A stable load factor, countercyclical to hydro, and is close to the main consumption area. So we have a very positive outlook on cogeneration demand in Brazil. We're very excited about the joint venture we have with Solazyme. This is a 50-50 joint venture. We are constructing together the world's largest fermentation plants, fermenting sugars using microalgae to produce tailored oils. So we will be able to take sugars and create, effectively, palm oils or palm-equivalent oils tailored to customer needs. We expect this joint venture to start up later this year. It's adjacent to our Moema mill and gives us an additional area of demand to tap into.

So to conclude, we built a very competitive platform in Sugar & Bioenergy, and we're positioned to be best-in-class performer. Agriculture is the key value driver. It needs new capabilities, but we're developing those capabilities. Very clearly, we've had challenges in the last 3 years and we're responding. We're increasing our yields and improving our capacity utilization. We are investing in efficiency, cogeneration, flexibility. This is a business with very strong fundamentals and growth and technology potential. We do believe the Brazilian government recognizes it needs to provide an economic signal to expand ethanol production. Thank you. I'll turn over to Drew.

Andrew J. Burke

Good afternoon. I will take you through the financial review and let's start by taking a look at our 2012 results. We had very strong volume growth during 2012. You can see that our tons that we handled and sold went from 137 million to 153 million tons. That was driven by a 13% increase in our Agribusiness volumes. That increase reflects the impact of the new investments we had, particularly noteworthy were the port in the Pacific Northwest and the Nikolayev port in the Ukraine. We also did see strong origination out of South America and the Black Sea region. Our EBIT for the year -- our adjusted EBIT was down slightly year-on-year as the strong performance in Agribusiness was offset by declines in our other businesses. Our Agribusiness had a record year with performance 20% over their prior year, which have been -- also have been a record year for us. We had very strong origination volumes out of South America and that combined very nicely with our global market to distribute the product into the Middle East, North Africa and Asia. We also had a good performance in our crushing businesses during the year. If we take a look at Sugar & Bioenergy, it was heavily challenged by a few things. First the margins were negative on hydrous ethanol due to the pricing pressure versus the cost. And secondly, the adverse weather impacts on sugarcane yields and ATR. The impact on lower yields and ATR affects both our revenues and our costs. Food & Ingredients had a very nice second half to the year. The first half was a little bit weaker because we had some issues around the implementation of an ERP system that caused us to lose some sales opportunities. So overall, a good year driven by a very strong Agribusiness performance. As we move forward to 2013, we expect a strong performance for our businesses. As Raul explained, in South America, we expect very large crops. We are very well positioned in that region from a grain origination, logistics, port and processing standpoint, and it connects very well to our global distribution network. We expect the South American season for the exports mainly coming out of South America to last from March to September. At that time will be to the new crops in the Northern Hemisphere and we expect the export demand to shift to those markets and to see good margins in North America and Europe in the latter part of the year. Sugar & Bioenergy, we expect 2013 to be the year where we become solidly profitable. A number of things should help us turn the corner on that business. First, and most importantly, we'll be able to produce at capacity. That is a significant increase from 17 million tons to 21 million tons. Not only does that drive higher revenues, but that is a business with very high fixed cost, so you get quite a bit of margin expansion. Secondly, as Ben explained, we've taken our costs down as we move into the next year. And third, we do expect some help from the weather and the normalization of crop yields in the amount of total recoverable sugar in the cane. So we think things line up for a much better year to get to our longer-term target in Sugar & Bioenergy. We need to see an expansion in the ethanol margins. We don't feel we'll be to where we need to go to get to $8 to $10 a ton in 2013, but it's certainly the increase in the blend the rate with gasoline on the anhydrous ethanol from 20% to 25% is very supportive, as well as the fact that we've seen an increase in the gasoline price. We expect Food & Ingredients to do very well next year and to continue along the trend line from the second half, plus we expect to see our acquisitions continue to produce some growth, and we have a couple of interesting new investments coming onstream.

Just to talk for a minute about our financial policy and framework. We are investment-grade credit rating and we consider that a key part of our long-term success. Liquidity in this business is very important, particularly in the Agribusiness segment and we would like to have a strong BBB credit rating in order to maintain that. We have our internal metrics and our financial planning aligned with achieving that goal.

We have had a consistent record of increasing dividends since we went public in 2002. As you can see from the chart our dividend has increased at an annual rate of 11% throughout that time period. To conclude, we believe we have the right capabilities for the long-term. We've done -- had those in place in our Agribusiness operations for a long time. Now that we're able to produce enough sugarcane, operate at capacity and we've gotten up the learning curve at near best in class in the agriculture portion of that business, we think it's there and we've been able to expand our base very nicely in our foods business. We're very well prepared for today's market and what the next year will bring, and we're confident that over the long term we'll have improving returns as Agribusiness continues to be a strong performer, Sugar turns the corner and becomes strongly profitable and Food continues on the growth trajectory it's on.

Thank you very much. We'll now turn it back to Alberto.

Alberto Weisser

Thank you, Drew, and we finished on time. Well, so we are ready for questions.

Question-and-Answer Session

Unknown Analyst

Coming up on a very significant situation with the switch to the South American exports, can you -- kind of 3 questions just related to this. How tight do you anticipate the South American logistics? Overall, how tight will that be? Can you put some historical perspective on what the world is effectively asking South America to do in this coming export cycle? And the second related question, can you benchmark for us how efficient you are as an exporter out of South America relative to your competitors to give us some sense as to what your advantage is after many years of infrastructure development? So if we could start there, please.

Alberto Weisser

Okay. It is a -- it's supposed to be, obviously, the very large crop, the largest ever. We believe that the infrastructure over the years has improved, although it really lacks quality and probably the biggest concern is inland logistics trucking. The laws changed in Brazil, so the drivers cannot drive anymore as long as they used to, so the limitations in trucking is going to be up. So I think it will be possible to handle it, to manage it. Obviously, the harvest is a couple of weeks, 6, 7 weeks or so, but the whole program is over 6 months that the harvest will be taken to the ports and exported. Some new logistics have opened up like to the north, to the Amazon River, and so we believe it will be possible to handle it. We have prepared ourselves at Bunge. Might not be well known, but we own a significant amount of silos. We have expanded them. We have long-term contracts with trucking companies, with railways. We have to remember that Bunge is larger than the second and third operator in South America, the second and third competitor. We also operate 11 port terminals in 8 ports. So we feel that we are very well prepared for the challenge, and I think we're also going to look quite well vis-à-vis the competition. Raul, do you want add something?

Raul Padilla

No, I think you addressed everything. And also we're very competitive with the logistic structure that we have in the rest of South America, Argentina and a couple of months in Paraguay. And it's going to be challenging, that's -- we cannot avoid that, but I think we are better positioned than everybody else.

Unknown Analyst

Is there any way that you can give us just some sense as to what the logistical advantage is? I mean in many cases that your ability to load the boats was significantly faster than your competitors, so the amount of time the boats would stay in harbor would be much lower. This then just simply results in an advantage in dollars for -- how much lower dollars per ton your total logistical system is. Is there any sense or quantification that you can give to us to maybe dimensionalize the advantage that Bunge holds?

Alberto Weisser

Look, we'll not give you the details because that's real competitive advantage. But just think of it, we have by far the largest contract on railways. And so others will have to use trucks where we use rails. When you think about these port terminals where we control, when our ships dock and when they are loaded and then leave, this is a significant amount of savings. Just think of it, 1 ship waiting outside the harbor costs $20,000 a day. So we have a couple of days' advantage vis-à-vis others. But we don't go into the details because there is a significant advantage. Yes, Ken.

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

You guys talked about adding capacity, both on the logistics side and the crushed capacity. Could you talk about how much crush capacity has been added relative to 2012 versus 2011, 2013 versus 2012? And then how much logistic capacity has been added 2012 versus 2011 and then 2013 versus -- so we get an idea of how much Bunge-related growth there is that we can kind of try and model a little bit?

Alberto Weisser

Raul, you want to...

Raul Padilla

Well, we have 2 port facilities in Nikolayev and EGT in Northwest U.S. That's increased a serious amount of volume. And a number? It could go to 9 million. Volume, 10 million tons. 10 million tons. Percentage, 10%, yes, more than 10% increase in volumes that we handled between 2012. In fact, we increased 13% between 2011 in volume, total volume. That was the increase in port facilities, in duration and crush capacity that have been able. We have Paraguay, both. We have another one in Asia that's going to go in 2014. Percentage-wise, it's going to be probably 5%. Now this is -- what I would like to say -- what is important is, Bunge was the only one -- company in the last 5, 8 years who has reduced crush in North America to adjust to efficiency. So we were one of -- in fact, the only one who reduced the capacity to bring -- we do have excess capacity in North America, so we did our drop to eliminate excess inefficient capacity. So from now on it's only growth. We don't need to reduce anything in North America. Rob?

Robert Moskow - Crédit Suisse AG, Research Division

Alberto, you always get this question, but from a return on capital perspective, Bunge has invested very heavily across the business and we understand that Sugar is not getting the returns that it hopes to get right now. If you just isolated the other 2 parts of the business, can you give us any kind of estimate on what kind of returns they're generating? I think you would agree that they're above their cost of capital right now?

Alberto Weisser

I would say we will reach our cost of capital this year, even with Sugar not yet getting there. We expect that Sugar will reach its cost of returns -- the returns of Sugar next year, in '14, will be higher. And in '15, we should reach cost of capital in Sugar as well. So we are on our way to get to the 2% points above. Agribusiness and Food & Ingredients are above our cost of capital. Now our Sugar & Bioenergy is $3 billion, and we had negative earnings last year. So we are on our way. And fertilizer has been very volatile, but with the significant reduction in fertilizer by selling a good portion of it, we will not have that missing component. So this year, summarizing, we should be on cost of capital and Sugar will be on cost of capital in '15. Is that correct, Drew? Okay. Yes, another question? Yes, sir?

Unknown Analyst

Yes. I just have a question regarding Sugar. You plan to expand capacity. I know last year has been really been challenging for you and the industry, but do you expect to see some capacity maybe come out, or see some consolidation within the industry and will Bunge be a consolidator or will most of the growth come from greenfield plants or you're expanding your own capacity?

D. Benedict Pearcy

What we've seen in the last 2 or 3 years is a large numbers of mills have actually shut down because of the financial pressure. In fact, a lot of that cane has been redirected to existing mills. So this year, this crop is going to be very interesting because we're going to find out how much capacity is there. We expect to have a large crop between 580 million and 600 million tons of cane, that's going to be very close to maximum capacity in Brazil. So it will be interesting to find out what happens. We don't see any greenfield projects in Brazil at the moment. You need a sugar price above $0.22 to make a greenfield project work. There are no projects in the pipeline. So the capacity -- we don't see capacity expansion coming except through incremental improvements. One would expect to see further consolidation in the industry.

Alberto Weisser

Do we have time for one more? One more. Yes, Ian.

Ian Horowitz - Rafferty Capital Markets, LLC, Research Division

Alberto, over your tenure, you've often talked about how you have more projects to invest in than you had cash flow, and I realize you're retiring and so maybe this falls on your -- the next person down the line. But could you talk about sort of where is your priorities going forward. I think the sugar business something you've been working on for quite some time probably didn't play out the way you thought it would when you started it. You talked about different feedstocks that you would be interested in, different geographies. I'm just curious about what's your appetite for trying a new feedstock, given kind of what happened with sugar or would you rather spend the capital on the Agribusiness segment, which seems to be poised for a pretty good year, at least in 2013, if not over the next few years given the shortages we're seeing.

Alberto Weisser

Look, we did not change our strategy over the last 5 years. So although we had the setback in sugar because of the weather issues in '10, '11 and even the remnants in '12, we believe today that the potential of our Sugar & Bioenergy is even better than when we decided in '05, '06 to get into it. We underestimated some of the opportunities like cogeneration, the efficiencies that we can extract. Now, okay, this is part you saw from Ben's chart on the yield. The 2 worst years in 20 years was '11 and '12. So this should not be repeated. If it repeats itself, prices will have to adjust. So something will give. So we are convinced that it's right. Now also, we made the investments in Sugar & Bioenergy by not sacrificing any investment in our other businesses. We raised $900 million in equity for the first 3 mills and we also made the acquisition of Moema with paying the shares. So we did not sacrifice our cash flow for the existing business. The cash flow in Sugar is large enough in the Sugar business because it has a huge depreciation and depletion. So the cash flow is enough today to sustain itself, Sugar & Bioenergy and contributing to others. So our priority is now Sugar is core. So it is oilseed and grain, all the monies we want investing. But we also are realistic that the company of our size managing $1 billion in CapEx is more or less what we can do. It is very difficult to do more. We have, in the past, extended ourselves and we have had problems with some of our plans. So we know our pace of what we can handle, so it is around $1 billion, $1.2 billion, but we have not sacrificed any expansion in the other existing businesses.

Robert Moskow - Crédit Suisse AG, Research Division

We better end it there. Thank you very much, Alberto. Thank you for Bunge for sponsoring dinner on Thursday.

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Source: Bunge Limited Presents at 2013 Consumer Analyst Group of New York Conference, Feb-20-2013 03:00 PM
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