Adecoagro S.A. Q2 FY2023 Earnings Call

Good morning, ladies and gentlemen, and thank you for waiting. We would like to welcome everyone to Adecoagro's Second Quarter 2023 Results Conference Call. Today with us, we have Mr. Mariano Bosch, CEO; Mr. Emilio Gnecco, CFO; Mr. Renato Junqueira Pereira, Sugar, Ethanol and Energy VP; and Ms. Vitoria Cabello, Investor Relations Officer. This event is being recorded. Before proceeding, I want to mention that forward-looking statements are based on the beliefs and assumptions of Adecoagro's management and on information currently available to the company. These statements involve risks, uncertainties, and assumptions related to future events and depend on circumstances that may not occur. Investors should understand that general economic conditions, industry conditions, and other operating factors could impact Adecoagro's future results and cause them to differ significantly from those expressed in forward-looking statements. Now I will turn the conference over to Mr. Mariano Bosch, CEO. Mr. Bosch, you may begin your conference.

Good morning, and thank you for joining Adecoagro's 2023 second quarter results conference. As you may have seen in the report, we are presenting very good results despite the extreme drought that impacted some of our operations. Our adjusted EBITDA was 15% higher compared to last year. It is in times like this, when we can clearly show and monetize the benefits of being diversified and focused on achieving efficiencies in our whole value chain. We are very excited about how our Sugar, Ethanol and Energy business is performing. The development of our sugarcane plantation is really good, and we expect to increase crushing volumes by 15% compared to 2022. We have a large flexibility to shift production, and we are using it to maximize sugar production. We have about 25% of this year's sugar production and almost all of our next year's still are hedged and very well positioned to continue to capture solid prices. 30% of our expected annual ethanol production is stored in our tanks to be sold in the following quarters. This decision to carry forward ethanol is already proving to be a good one, as prices are expected to increase following the increase in gasoline prices and the Otto Cycle growth. The reason why our sugarcane plantation is in great shape is because of our focus on achieving efficiencies. As I mentioned before, throughout the past years, we have put a special focus on our farming activities. As a result, we are reaching incredible levels of TRS content per hectare. For example, we implemented Muda Pre Brotada or pre-sprouted seedling through the multiplication of meristem, which is technology only used by us. This enables us to really reproduce cane varieties that are better adapted to our region at a much faster pace and replace the older varieties. We even built a factory that now produces 26 million seedlings every year. We are using a two-line harvester, which not only reduces diesel consumption per ton but also soil compaction, leading to better yields of sugarcane. We use biological pesticides to control pests. We use drones and artificial intelligence to monitor our plantation and apply treatments only in the areas with infestation among many other examples. These innovations are good not only for our productivity levels but also reduce our cost per ton and improve our carbon footprint. Another good example of this is our production of biomethane, which we are already using to power more than 130 vehicles replacing diesel consumption. We are very happy with the region where we are located with our sugarcane plantation and our needs, the work that we did and the potential that we still have ahead. Now let's move into our Farming business in Argentina and Uruguay. In our Crops business, as we mentioned in the past releases, we experienced an unprecedented drought. Our results in this segment are a reflection of this. Now we are focused on the '23, '24 campaign, where we are starting fresh with no long-term impact in our earning potential from the drought. We have already started planting activities, and we have good expectations for the new crops with the favorable El Nino forecast. In our dairy business, last year, we finished populating our four free-stalls. Productivity per cow came marginally down as we navigated the challenges of operating at full capacity. This year, productivity is at record levels, reaching almost 38 liters per cow per day on average. In terms of prices, there is a mixed performance, but we have the flexibility to adapt to the context. In the case of our rice business, the decision we made last year to set a foot in Uruguay by acquiring four rice mills strategically located is already paying off. In Argentina, even after the dry year, we managed to do very well. We own and operate one of the largest fully integrated rice operations in the world under a sustainable production model where we develop our own seed genetics and produce varieties customized to our clients' needs. We are building trusting relationships with clients all over the world and consolidating as a leader of this market, offering high-quality rice and full production traceability coming from Uruguay and Argentina. Now we have a huge opportunity in front of us. There is a lack of water in many rice producing countries of the world, and they are cutting their rice exports. This means that there will be a very clear need for South American rice. Having operations in Argentina and Uruguay, we are uniquely positioned to benefit from this. Another thing we are very enthusiastic about is the work we are doing in ESG. We have been working on emphasizing the sustainability profile of our production model and monetizing them. The sale of carbon credits in Brazil is the most obvious example. But we also have several certifications for our products and processes and clients willing to pay a premium for them. Sustainability is part of our DNA. Every day, we work to develop sustainable production models in the interior of the countries where we operate. In our integrated ESG report, we show with great details how we do this. I invite all of you who are interested to read it. We have a very positive outlook ahead. Also, we are compliant with our distribution policy. We recently distributed dividends, and we continue repurchasing shares, always maintaining our debt below 2x EBITDA. To conclude, I want to thank our teams. This year started off with many challenges, but with your hard work and commitment to efficiency, we now have a very positive outlook ahead of us. I feel confident that we will continue to generate good returns and value to our shareholders. Now I will let Emilio walk you through the numbers of the quarter.

Thank you, Mariano. Good morning, everyone. Let's start on Page 4 with a summary of our consolidated financial results. Gross sales totaled $407 million during the second quarter, making a 6% year-over-year increase while on an accumulated basis, it reached $654 million, 11% higher than the previous year. This was mostly explained by our commercial decision to favor sugar production and execute sales at solid prices, coupled with higher average selling prices in our rice division. Consequently, adjusted EBITDA expanded to $136 million during the quarter, whereas year-to-date, it stood at $226 million, 15% and 10% higher than its respective previous periods. Please turn to Slide 5 for our broader view of our consolidated financial figures. As you can see on the bottom right chart, crushing volumes in our Sugar, Ethanol and Energy business were up 42% on a year-to-date basis on account of greater sugarcane availability and solid productivity indicators. On the other hand, total production in our farming division reported a 27% year-over-year reduction, mostly explained by crops due to the effects of an unprecedented drought in Argentina, which impacted area and volume produced. Let's move ahead to Slide 7 with the operational performance of our Sugar, Ethanol and Energy business. Crushing volume amounted to 3.6 million tons during the second quarter, marking a 9% increase versus the prior year. This was mostly driven by solid productivity indicators enhanced by good precipitation registered during the first six months of the year. Thus, agricultural productivity indicators such as yields presented a year-over-year improvement from 60 to 78 tons per hectare in the quarter, while TRS content increased from 119 to 126 kilograms per ton. In terms of mix, we diverted as much as 48% of our TRS to sugar production in line with our strategy to maximize production of the product with the highest marginal contribution. Within our ethanol production, 70% was anhydrous, and to further profit from the premium that this ethanol commanded, we dehydrated over 22,000 cubic meters of hydrous ethanol stored in our tanks. On a year-to-date basis, crushing volume reached 5.1 million tons, 42% higher year-over-year. This is explained by a significant improvement in yields and TRS content, as well as greater sugarcane availability, which enabled us to resume our continuous harvest model during the first quarter of 2023. As mentioned before, the production mix stood at 48% sugar in line with the quarter as shown in the bottom right chart, while we maximize sugar production throughout the first semester to profit from the rally in global sugar prices. The opposite was observed last year as ethanol prices reached record levels in Brazil. This proves the high degree of flexibility of our mills. Please turn to Slide 8, where we would like to describe our sales throughout the year. Net sales amounted to $179 million during the quarter and $274 million in the first semester, making a 9% and 18% increase compared to the previous year, respectively. In both cases, this was driven by higher sugar sales on higher production and prices which fully offset the year-over-year reduction in ethanol sales. As you can see on the top left chart, selling volumes of sugar amounted to 317,000 tons year-to-date. As our mix decision favored sugar production to capture the price premium over ethanol. Consequently, our average selling prices increased 9% during the first semester, and we benefited from excellent sugar prices. In the case of ethanol, the decrease in volumes sold was driven by a reduction in ethanol production, coupled with our commercial decision to increase our carryover stocks. The year-over-year comparison does not see fair during the second quarter of 2022, we took advantage of a market opportunity that ethanol offered and sold ethanol at very attractive prices. As explained in prior releases, last year, we sold most of our ethanol volumes at prices as high as $0.26 per pound of equivalent, taking advantage of a shortage in supply caused by the late start of harvesting activities in Brazil. It is worth highlighting that this year, we also benefited from a peak in demand and sold 52% of our ethanol volume there, capturing 12% above the average price of the quarter. Within the 132,000 cubic meters of anhydrous ethanol sold year-to-date, 22,000 cubic meters were exported at an average price of $0.205 per pound equivalent out of which 16,000 cubic meters were conducted during the second quarter at an average price of $0.208 per pound. This is so since we have the necessary certifications and industry capacity to meet product specifications. On an accumulated basis, energy selling volumes increased 13% compared to the prior year, even though its average selling price decreased by 10% due to lower energy spot prices. Regarding carbon credits, year-to-date, we sold over 250,000 carbon credits, 34% lower than the previous year at an average price of $18 per carbon credit. This is explained by the lower year-over-year production and sale of ethanol, which led to a lower amount of carbon credits issued. Please go to Page 9, where we would like to present the financial performance of the Sugar, Ethanol and Energy business. Adjusted EBITDA amounted to $117 million and $194 million during the second quarter and the first half of the year, respectively. In both cases, the increase in adjusted EBITDA was driven by higher net sales as well as gains in the mark-to-market of our harvested gain on higher crushing volume. However, results were partially offset by a year-over-year loss reported in the mark-to-market of our commodity hedge position. Finally, to conclude with the Sugar, Ethanol and Energy business, please turn to Slide 10, where we would like to briefly talk about the current outlook for the rest of the year. Assuming normal weather conditions, we expect our crushing volume in 2023 to be approximately 15% higher than in 2022. As we have sufficient sugarcane availability to use our industrial capacity. This, in turn, will result in a reduction of unitary costs due to better dilution of fixed costs. From our commercial point of view, sugar prices continue to be supported by strong fundamentals and are trading on average about $0.24 per pound. We are in an excellent position to profit from this scenario as we have 25% of our expected 2023 sugar production unhedged. And for 2024, 90% of our sugar position remains open. In the case of ethanol, we are taking advantage of our storage capacity to carry over production into the following quarters to profit from higher expected prices. We believe that ethanol will continue to play an important role in the energy transition matrix, not only in Brazil but globally, and we believe Adecoagro will make its contribution.

Now we would like to move on to the Farming business. Please go to Slide 12. As of the beginning of August 2023, we harvested 96% of the total area and produce over 800,000 tons of agriculture produce. The remaining hectares are expected to be fully harvested during the rest of this month. As anticipated, yields for most of our summer crops presented a significant decline compared to the previous campaign due to the record drought that Argentina and Uruguay experienced as a consequence of the La Niña weather event. Nevertheless, there have been possibilities of developments impacting the price of some of our products, which help us to partially mitigate the weak performance at the farm level. The Argentina government passed a resolution that allowed for the use of a preferential foreign exchange rate to convert the proceeds from sales of rice, soybean, corn, peanut, and sunflower, which partially offset the decrease in yields. Also, in the case of rice, India, the world's largest rice exporter, recently announced the ban of long-grain white rice exports to secure domestic supply. Thus, we expect to profit from this, thanks to our flexibility to sell into the export market and offer full product traceability. To conclude, we began planting activities for our next campaign starting with wheat and other winter crops. We expect a positive outlook for the upcoming season, especially since the weather forecast is shifting to a moderate El Niño pattern, which should allow for an improvement in soil moisture and recovery of water levels in the reservoirs favoring the outlook for the '23, '24 harvest season.

On the following Page 13, we would like to present the financial performance of our Farming and Land Transformation businesses. Adjusted EBITDA totaled $24 million in the quarter, marking a 22% year-over-year increase. Year-to-date, adjusted EBITDA was $43 million, 23% lower than the previous year. In both cases, this was explained by an outperformance of our rice and dairy divisions which fully offset the poor performance of crops as expected due to the record drought caused by the La Niña weather that affected yields. Starting with our crop business, adjusted EBITDA amounted to $313,000 and $509,000 during the second quarter and first semester of the year, respectively. As previously explained, results were mainly impacted by the reduction in yields coupled with a genuine increase in costs in U.S. dollar terms as a reduction in planted area versus the previous season. Adjusted EBITDA in our rice business was $15 million during the second quarter and $27 million on an accumulated basis. Despite a reduction in yields compared to the previous campaign and higher costs in U.S. dollar terms, adjusted EBITDA was higher year-over-year. This was driven by an increase in both volume and average selling prices due to a better mix of higher added value products as well as the use of the preferential exchange rate mentioned above, among other factors. Moving on to the dairy business, adjusted EBITDA totaled $10 million, 41% higher than prior year, while year-to-date, it stood at $16 million, marking a 15% year-over-year increase. Results were explained by higher average selling prices as we produce more fluid milk for the domestic market, which offered the highest marginal contribution during this period, coupled with our continuous focus on achieving efficiencies in our vertically integrated operations. Results were partially offset by higher costs, including the cost of feed for our dairy cows. In the case of land transformation, although no farm sales were concluded, results reflect the mark-to-market of an account receivable corresponding to the latest sale of farms in Brazil, which tracks the evolution of soybean prices. Let's now turn to Page 15, where we would like to present our capital allocation strategy. In 2022, we generated $141 million of net cash from operations. According to our distribution policy, we are committed to a minimum distribution of 40% of the cash generated during the previous year via a combination of cash dividends and share repurchases. In terms of dividends, on May 24, we paid $17.5 million in cash dividends, representing approximately $0.16 per share which corresponds to the first installment of our annual cash dividend. The second shall be payable in or about November in an equal cash amount, resulting in a noncash dividend of $35 million. In addition, we have already repurchased $14 million in shares year-to-date, which represents approximately 1.6% of the company's equity. Moving on to the debt position. Our net debt increased 3% compared to the same period of last year, amounting to $852 million. This was explained by the financing of our working capital requirements, mainly related to advanced purchases of agricultural inputs at attractive prices in order to take advantage of low cost of capital. Furthermore, the Brazilian Real appreciated 8% versus the prior year, consequently impacting our debt denominated in such currency. As of June 30, 2023, our liquidity ratio reached 1.3x, showing the company's full capacity to repay short-term debt with its cash balances, whereas our net leverage ratio was 1.9x, in line with the previous year. To conclude, 29% of total CapEx invested throughout the quarter was destined to expansion projects. Investments on this front were mostly related to increasing our sugarcane plantation as well as other complementary projects such as the construction of our second biodigester in Brazil to increase our biogas production, which later is converted into biomethane and is used to replace our diesel consumption. In our Farming division, we are finalizing the construction of our second biodigester in our dairy business, which will be using cow manure as an input to generate renewable energy, a project that is aligned with our sustainability committee. Thank you very much for your time. We are now open to questions.

The first question is from Thiago Duarte from BTG Pactual. Your microphone is open.

Hi, Mariano, Emilio, Renato, and the team. Thank you for this opportunity. I have two points for Renato regarding the sugar and ethanol business, plus a final question for Mariano and Emilio about capital allocation. Renato, can you discuss the possibilities for enhancing the flexibility to move away from low ethanol prices in Brazil? I'm asking if there are plans to increase sugar production capacity beyond what is currently maximized. Additionally, could you elaborate on the opportunities for boosting ethanol exports, considering that while you've achieved attractive export prices, the volumes are still not significant relative to total ethanol production? Is there potential for increasing the sugar mix and ethanol export volumes? Moving to biomethane, it's great to see your efforts in producing more biogas and biomethane as a diesel substitute. Can you provide insight into the economics? Specifically, how do the costs of biomethane compare to diesel? Any details on unit economics would be helpful to understand the economic implications alongside the decarbonization benefits. Lastly, Mariano and Emilio, could you discuss capital allocation? It seems like you're headed for a strong year in margin expansion for sugar and ethanol, along with favorable rice prices, suggesting good cash flow generation. You mentioned some ongoing expansion projects, but it seems you might choose between increasing dividends, repurchasing shares, or starting new projects. Can you provide more clarity on what we should expect now that the company is deleveraging faster than anticipated? Thank you.

Thiago, thank you very much for your question. I think as you mentioned, Renato will address your three main points on the sugar and ethanol, and then we will take the capital allocation. Renato?

Thiago, thank you for your question. In terms of sugar production, it's important to note that we have significantly increased our output this year, showcasing our capacity. In July, we achieved a record monthly production of 116,000 tons of sugar, which is 12% above our previous record. We are operating at levels 18% beyond our installed capacities in July and August. Additionally, the quality of the sugarcane in the third quarter is very good, with TRS in August exceeding 150 kilograms per ton. As for expanding our capacity next year, we believe there are still bottlenecks in our sugar operations that we can address to increase production. We estimate that we can add approximately 40,000 tons of sugar next year, assuming the sugarcane quality is lower than it is now. Regarding ethanol, we have commenced production and currently store over 215 million liters. We anticipate growth in the Otto Cycle occurring faster than previously expected, with an estimated increase of close to 11%. The recent gasoline price increase by Petrobras boosts ethanol's competitiveness. Currently, the ethanol price percentage is around 61% to 62%, indicating potential for further price increases as the Brazilian season approaches its end, allowing for higher selling prices. On the biomethane front, we are optimistic about our project. Our production cost for biomethane is nearly BRL 1 per liter of diesel, compared to diesel prices ranging from BRL 4.5 to BRL 4.8 per liter. We have the capacity to produce more biomethane than we can currently utilize in our fleet, leading us to explore options for selling any excess production.

Thank you, Renato. Thiago, regarding capital allocation, the first point I want to emphasize is that we need to recognize we began a very challenging year. We are optimistic about our future results, but it's important to understand that we are actively working to improve our situation. It's crucial to note that we will continue to uphold our distribution policy, which is of utmost importance. Additionally, we aim to keep our net debt-to-EBITDA ratio below 2x. Given these factors, as you've observed, there are specific and synergistic projects in the sugar and ethanol sector, as well as some in rice and dairy. However, we do not foresee any large specific projects that would alter our policy, which remains our top priority.

All right. That's very clear. Thank you.

Next question is from Guilherme Palhares from Bank of America. Your microphone is open.

Good morning, everyone. Thanks for taking my question. I would like to explore a bit on the farming side, right? We are finally moving away from El Niño and maybe going into a season that might look a bit better in terms of primary conditions. So a question that we have around that is regarding yields for the next year, right? Because we had three years of El Niño conceptually and we would like to have a bit of a sense whether you see yields normalizing already in the next harvest season or whether the depletion of the soil through three consecutive droughts could have a long-standing impact in terms of productivity for the coming season. So that's question in terms of farming. And another one, in terms of dairy, we are seeing that the company is already beating its initial estimates in terms of the herd that you are managing, you see that herd continues to grow and whether you're reaching a new goal in terms operational just the sheer size of the operation of dairy, whether you see herd continue to grow or we are stabilizing on that level? Thank you.

Guilherme, thank you for your question. Number one, regarding the El Niño forecast and the yields expected for next season in crops, it's very clear that there is no effect on the past drought. So we are starting from scratch the new season. So we can expect normal yields going forward. Furthermore, with El Niño, we should expect above-normal yields, but we are only using as a budget, the normal yields for the last five years average. That is regarding crops in general. Then to your specific question on dairy, in the dairy cows, we are achieving and even going beyond the productivity levels, but this is within the same cow herd. We are not planning to increase our cow herd for now. We are simply increasing its productivity on a per-cow basis. This increase in productivity also has to be taken into account with the new biomethane production that will start to produce by the end of this year, so that will also increase our sales through the sales of electricity generated by the biodigester. So those are the increases that will happen in the dairy business. On top of this, also in the dairy business, we should see improvement through this investment that we've done in the cheese factory that will also increase our total sales. But in terms of the cow productivity, it's only this increase in productivity on a per-cow basis. Furthermore, there are some value-added products in the domestic markets that we are also improving or achieving the market, and that will also generate some additional profits in the dairy business.

Thank you, Mariano. That's very clear.

Next question is from Lucas Ferreira from JPMorgan. Your microphone is open.

Hi, everyone. Good morning. Thank you for taking my questions. I have a few regarding Argentina. First, about the rice business. You mentioned that India has banned exports, and we’re seeing rice prices in key Asian markets increasing by 30% to 50%, depending on the index. My question is about the prices you're currently selling and exporting in the rice business. How do those compare to the realized prices from the second quarter? I'm trying to get a sense of the potential upside you could experience in the third or fourth quarters for this sector. My other question is more focused on the macroeconomic situation in Argentina. Given the recent currency devaluation, could you remind us about your net exposure to the currency? I know you do sell some products locally, but you primarily focus on exports, while still needing to purchase inputs. I'm curious about the overall impact you expect from the devaluation. Additionally, you mentioned the preferential foreign exchange rates, so I would like to know how you expect these new FX levels to affect your business. Thank you.

Lucas, thank you for your question. Regarding rice, as we explained in our presentation, we are very optimistic. We see this advantage. We see that we are very well prepared from South America, from Argentina and Uruguay with this large operation that we have, and the investment we did last year in getting into Uruguay. We are very well positioned to supply the world's market and these needs that the world has today. So how much this increase could be? We are increasing compared to last year in relevant value in terms of prices. Regarding the last particular increase in the Asian prices because of the ban of India, there is also an increase for next year, and we feel more comfortable there, and we continue to benefit from that specific situation. But it is more important than that because we are developing these specific varieties to specific clients all over the world. And that is giving us an advantage on top of the long grain rice that is the more commodity in the rice commercial business. So that is regarding rice. And then regarding the market of Argentina and this recent devaluation. Just to remind you, from Argentina, we export 70% or between 70% to 75% and 30% to 25% on the domestic market. So the devaluation in general is positive for our margins. It depends on when and how this devaluation happens is more or less positive. We are well positioned to take advantage of this specific measure. Furthermore, we anticipated some acquisitions of inputs for this campaign that we are planting now and that I mentioned we were optimistic, and there, we also took some advantage of how these fertilizers and chemicals were already acquired and in our balance sheet that are dollar-denominated costs within the total production. So I would say this is very positive for us in terms of our future results.

Excellent. Thank you very much.

Next question is from Daniel Sasson from Itau BBA. Your microphone is open.

Daniel are you there? Daniel from Itau I think is not there. Daniel is saying his mic is not working. You may ask your question. Can you type your question in the prompt.

So Daniel Sasson from Itau. He is asking, I also have a question on innovative projects. Could you please give us some color if you're looking into the submarket for ethanol. Also on biomethane, do you see any potential to sell your technology to other mills in the medium to long term in exchange for royalties? And another question regarding your sugar division, given the hike in prices over the last couple of months, do you have plans to increase your sugar capacity? For how long do you think that prices would have to remain this high before we see the industry increasing capacity as a whole once again?

Okay. I will ask Renato to answer the question regarding the sugar division and the expansion that he has already mentioned something, but he can be more precise on this, Renato?

Daniel, thank you for your question. As I mentioned before, we have plans to increase our sugar production for next year by removing some bottlenecks that we have in the operation of the process. By doing this, we will be able to produce more sugar. And if the TRS content is lower than the mix in the third quarter, for example, so we have some potential to increase any production of sugar.

Thank you, Renato. We are hearing some noise on your microphone. So I'm going to take the question on the biomethane and the technology, if that could be sold to third parties in exchange for royalties for that. That is clearly a possibility, but today, we are focusing on the execution of our own project. We have some specifics on our production system that include this continuous harvest model. So because of these reasons and that we use all the vinasse as a biofertilizer and that we are concentrating the vinasse. So there are some specifics to our own project that make as very profitable on developing these biodigesters on our own production system. So we are going to focus on the short term on our own specific project and develop that with the financing of Finep and all the different alternatives that we have in Brazil and after that, we are going to analyze in more details this possibility of getting some money from the technology. Then you also asked about these new technologies like sustainable aviation fuels. This is very interesting. The sustainable aviation fuels come from oils and from ethanol. So both technologies are things that we are looking at. There are some petroleum companies that have asked about this potential possibility. So we are simply looking at those, understanding how this will impact this sector and whether there is any specific possibility for us regarding this.

This concludes the question-and-answer section. I would now like to hand it back to Mr. Bosch for any closing remarks.

Thank you all very much for participating and hope to see you all in our upcoming events.