Adecoagro S.A. Q2 FY2024 Earnings Call

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro's Second Quarter 2024 Results Conference Call. Today with us, we have Mr. Mariano Bosch, CEO; Mr. Emilio Gnecco, CFO; and Mr. Renato Pereira, Sugar, Ethanol and Energy VP; and Mrs. Victoria Cabello, Investor Relations Officer. We would like to inform you that this event is being recorded. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Adecoagro's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other factors could cause results to differ materially from those expressed in such forward-looking statements. Now I'll 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 2024 Second Quarter Results Conference. Before going into the highlights of each business, I would like to make some comments on our shareholders' distribution. As of this date, we have exceeded our minimum distribution policy by $16 million. So far, we have invested $51.4 million to repurchase 5.2 million shares, equal to 4.9% of the company's equity, and also committed $35 million in cash dividends, with the first installment already paid. Furthermore, our Board of Directors approved the renewal of our buyback program, which enables us to repurchase up to an additional 5% of the company's equity until year-end. Consequently, we expect to continue allocating cash in share repurchases during the second half of the year. This clearly shows our commitment towards sharing results with our shareholders, while we continue investing in growth projects with attractive IRRs and maintaining our debt levels. Now moving on to results. Consolidated adjusted EBITDA during the quarter reached $140 million, 3% higher year-over-year, while year-to-date it amounted to $230 million, which is 2% higher than last year. Starting with our Sugar, Ethanol and Energy business, the investments in expansion planting are paying off. Given the good cane availability, we have crushed more and produced more while our unit costs remained unchanged. Despite the lower than average rainfall received, ample cane availability has become a competitive advantage for us. Although sugar continues to be the best product, ethanol prices are also recovering. Still, the lower-than-expected yields and the year-over-year decrease in selling prices were the main drivers toward the decline in adjusted EBITDA generation. In our Farming business, adjusted EBITDA generation almost doubled during the first semester versus the prior year. This was possible thanks to our decision to expand our rice footprint into Uruguay, and its consolidation with our already vertically integrated operation. This has positioned us as a relevant player in the region, always with a focus on being the low-cost producer. In crops, normal weather conditions after experiencing the worst drought in Argentina's history have led to better results, even though these are lower than expectations due to the decline in international prices. Lastly, in Dairy, we continue to consolidate our position in both the domestic and export markets with the development of our high value-added products, leading to better results each quarter. Before passing the word to Emilio, a brief update on ESG: In mid-May, we published our 2023 integrated report in which we reinforced our commitment towards reducing our carbon intensity by 2030. Moreover, an in-depth description of our sustainable production model is also available, along with our ESG strategy and practices. To conclude, I would like to express my gratitude to all our people across Adecoagro for their hard work. I am convinced that we have the right people and that we are following the right strategy to generate good returns and value for our existing 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 $398 million during the second quarter, while on an accumulated basis, it reached $651 million. Although volumes sold for most of our products represented a significant year-over-year increase, results were partially offset by lower prices for some of the commodities that we produce. That being said, adjusted EBITDA reached $140 million during the quarter, while year-to-date it stood at $230 million. Higher results during the quarter were driven by the sale of La Pecuaria farm, booked within our Crops segment, as well as the outperformance of our Dairy segment. This partially offset the lower results in our rice, and sugar, ethanol and energy operations. Now please turn to Slide 5. Regarding our production figures in the bottom right chart, we can see that crushing volumes in our Sugar, Ethanol and Energy business were up 21% versus the same period of last year. Higher crushing translates into higher volume and better dilution of fixed costs. In our Farming division, the increase in the production of grains was explained by a significant recovery in yields due to normal weather conditions during the development of our crops, as well as to a higher planted area. Let's move to Slide 7 with the operational performance of the Sugar, Ethanol and Energy business. Crushing volumes amounted to 4 million tons during the quarter and 6.1 million tons on an accumulated basis. The increase in crushing was mainly driven by greater sugarcane availability, thanks to our expansion planting activities and higher effective milling days due to the dry weather experienced year-to-date. Regarding productivity, TRS per hectare remains in line with the prior year despite a slight decrease in yields. In terms of mix, we continue to maximize sugar production given its attractive premium over ethanol. Within our ethanol production, we are maximizing the production of hydrous ethanol, as demand for this type of ethanol has been significantly increasing and gaining market share, offering a better margin. If required, we can dehydrate our ethanol at any time. Let's please turn to Slide 8, where we describe sales conducted throughout the periods. Net sales amounted to $172 million during the quarter, while year-to-date, reached $275 million. As you can see on the top left chart, the decrease in the selling price of sugar was mostly due to lower global prices driven by a stronger pace in milling in Brazil during the first half of the year. In the case of Ethanol, selling prices continued below the previous year due to greater supply. Having said this, the volumes sold throughout the quarter were strategically timed to profit from price spikes. Moreover, we continue to hold our ethanol inventories to profit from better prices in the future. This represents 84% of our year-to-date ethanol production. Moving on to Energy, we focused on complying with our long-term energy contracts. However, lower prices and a weaker Brazilian real drove the decline in sales. Regarding carbon credits, we have already sold over 240,000 CBios at an average price of $17 per CBio. 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 $107 million during the second quarter and $159 million for the first half of the year. Despite presenting year-over-year gains in the mark-to-market of our commodity hedge position, results were offset by year-over-year losses in the mark-to-market of our biological assets due to lower expected yields, coupled with the decline in net sales. 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. Assuming normal weather for the remaining 6 months of the year, we expect a cash and volume increase compared to 2023 due to good harvest space and cane availability. From a commercial point of view, the evolution of sugar prices will mostly depend on Brazil's crushing volume for the rest of the year, as well as its industrial flexibility to reach the total annual production expected by the market. We have approximately 30% of our expected 2024 sugar production still unhedged, while the balance was committed at an average price close to $0.23 per pound. In the case of ethanol, demand remained strong due to its attractive price versus gasoline, thereby absorbing new supply and supporting the recovery in prices. We expect to sell our inventories over the following quarters as we believe ethanol prices have room to continue increasing due to the current low parity at the pump as well as to the sugar situation in Brazil.

Thank you for your question. We are positive regarding ethanol prices. The hydrous demand has been very strong, actually 5% higher than the same period of last year. Demand is reaching almost 2 billion liters of hydrous per month. The parity rates at the pump are still at 67%, which benefits the consumption of hydrous ethanol. Also, the off-season is expected to be much longer than last year, resulting in lower supply during this period. If you consider the hydrous stock for use right now, it is 1 month lower than the same period of last year. Thus, we believe that the only way to curb demand is through prices. So prices have to surpass the 7% parity rate, which we think is going to happen in the coming months. It's difficult to predict exactly when, but we believe that this will be the case soon. We anticipate an upside of around 10% in the current prices. Remember that current prices in dollar terms are 12% higher than the same period last year, and 25% higher than at the beginning of the year.

It's only one actually. You guys have been carrying this higher level of ethanol inventory as discussed here, and the strategy to benefit from higher prices in the future is very clear I think. But I would like to hear more about the expected time to deploy these volumes into the market. So just wondering if you guys could please share your most updated thoughts on the ethanol price curve from the perspective of parity to gasoline prices and the threshold that makes the company more comfortable to clearly accelerate sales, maybe the expected timing for parity reaching this level? That's it from my side.

So I have a question also on Sugar and Ethanol, but more focused on Sugar because I think there are several moving parts at this point and the price has been quite volatile. So I would like to hear more of your thoughts on the sugar price outlook, at least for the remainder of the year. And in light of that, and what Renato just said about ethanol, right, how should we think about the mix towards the end of the season between sugar and ethanol? And my second question is on rice, right? We're definitely seeing rice prices at high levels, seasonally weaker in the last quarter, but I was wondering also if we remain optimistic about rice for the remainder of the season and if there's any outlook for 2025 as well.

Thank you for your question, Isabella. I will let Renato address your follow-up regarding the prices of sugar and the mix. Renato, could you handle that part, and then I'll discuss the question about rice prices.

Thank you for the questions, Isabella. So we remain positive regarding the sugar price in the short term. The low levels of world sugar stocks are among the lowest in the last 10 years. Also, the supply of sugar is very dependent on the Brazilian crop, which is facing a difficult year in terms of weather. The weather is very dry, and there was a cold front that hit some parts of Brazil, not helping the yield situation. Also, the mix is disappointing. Everyone was expecting the mix to reach 52% this year, but it now seems that is not going to be possible. It should be closer to 50%. We believe that we will have some opportunities to hedge the remaining production of this year and next year at higher prices. Additionally, we have focused on producing added value VHP bagged sugar, which carries a 10% premium over the conventional VHP dollar price since we have the tax rebate program, which also acts as a floor to change the mix towards ethanol. The floor today is around $0.18 per pound, and if the price of sugar goes below this number, we will be changing the mix. We do not believe that this will be the case, but that's the floor. Currently, we have 7% of the estimated production hedged at a price of $0.231 per pound.

I would like to touch on the outlook for sugar production in Brazil and sugar prices. A lot has been said about the dry weather and how that will affect the market. Can you explain what needs to happen? Because so far, sugar production and crushing across the board in Brazil has been really strong. How much yields or TRS has to decline in order to affect the expectation of sugar production in Brazil and impact global prices?

Julia, we think that there are two main points that will affect sugar production. First is the yield, which is expected to start declining from now on in the center-south of Brazil. The latest report from July indicated that yields were about 10% lower than the same period last year. The weather remains very dry, and there have been some weather events like a cold front that impacted some sugarcane areas of Brazil. Although the first part of the year saw higher yields, it was mainly due to the number of planted areas from 18-month-old sugarcane. That is no longer the case, and we will start to observe reductions in yields going forward. The second main point is the disappointing production mix. The initial expectation was that Brazil would reach a 52% sugar mix, but we now believe that it will be closer to 50%. This will result in a loss of about 2 million tons of sugar. We expect that the ongoing dry weather will affect yields further.

This concludes today's question-and-answer session. At this time, I would like to turn the floor back to Mr. Mariano Bosch for any closing remarks.

Thank you for everyone participating today, and I hope to continue seeing you in our upcoming events.

Thank you. This does conclude today's presentation. You may disconnect at this time, and have a nice day.