Earnings Call Transcript - AGRO Q3 2023

Operator, Operator

Good morning, ladies and gentlemen and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro's Third 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. We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the company's presentation. After the company's remarks are completed, there will be a question-and-answer session. At this time, further instructions will be given. 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 operating factors could also affect the future results of Adecoagro and 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.

Mariano Bosch, CEO

Good morning and thank you for joining Adecoagro's 2023 third quarter results conference. As you may have seen in the report, we are presenting very good operational and financial results. Our adjusted EBITDA during the quarter was $155 million, 27% higher compared to last year. We are very enthusiastic about how our sugar ethanol and energy business continues to perform. Last quarter, I mentioned some of the work we started doing a few years ago to enhance the productivity of our sugar cane plantation. I mentioned innovative techniques like pre-sprouted seedlings and its reproduction in our own bio-factory, the incorporation of state-of-the-art farming equipment, the use of drones and artificial intelligence, biological pesticides, etc. During this quarter, we saw the results of our work. For example, we achieved a record crushing volume of 4.5 million tons. The quantity and quality of our sugar plantation are in excellent shape with TRS content per hectare over 30% higher year-over-year. With this sugarcane, we produced a record volume of sugar. Indeed, we focused on solving minor bottlenecks in our sugar kitchen and were able to produce sugar above our nominal capacity, increasing our already large flexibility. And this came at a time when sugar commanded a premium over hydrous ethanol of more than 50%. We remain with our hedges open and very well-positioned to continue taking advantage of these price opportunities. Brazil is the most efficient country in the world in the production of sugar, and we own one of the most efficient operations in Brazil and therefore, in the world. The region of Mato Grosso do Sul, where our cluster is located, allows us to mill all year round, maximizing our milling time, while at the same time, diluting our costs. We are very proud of our operational teams for the constant search of efficiencies and opportunities to expand our production. Now, let's move into our Farming business in Argentina and Uruguay. As you already know, this year, we experienced the worst drought in history. This had an impact on our results. But during the year, we focused on strengthening efficiencies across all of our operations, finding saving opportunities to mitigate the impact. In the crop business, our results were significantly affected by the drought, as we mentioned in the past releases, but this is now behind us. We are starting fresh with the 2023-2024 campaign. All of our teams are fully focused on planting activities, which are being conducted under excellent conditions. The El Nino weather event that we have been talking about for the past months is now here and has improved soil humidity across all of our productive regions. We are in an excellent situation to maximize yields in all our crops and go back to normalized EBITDA levels for this segment. In the case of our Rice business, we are achieving even better results than last year. A big part of this was thanks to the decision we made last year to set a foot in Uruguay by acquiring rice mills. This offers greater sustainability to our operations and provided us with more commercial tools. We are entering into new markets, offering clients customized varieties of high-quality rice developed in our own seed unit and full product rice. This better mix of higher value-added products is allowing us to book a premium on top of the high lower price prices. In terms of the 2023-2024 campaign, water reservoirs have recovered thanks to the rains received. So, we have the necessary water levels to secure a successful campaign. So far, we have already planted 80% of our plan. In our Dairy business, we are achieving results in line with last year. The impact of the drought was mainly seen in higher costs of feed. However, we were able to mitigate this with record high productivity levels in our fully populated feed stores. Also, having the flexibility to sell into the domestic and export market and switch production from one to the other was key during this month of lower powder milk prices. Regarding our land portfolio, during the quarter, we sold the farm in Argentina for more than 20% above our independent appraisal and with a very attractive IRR. A quick note on ESG, as we always said, since inception, we have been focused on developing sustainable production models in the interiors of the countries where we operate. Part of the work we have been doing with our ESG committee is to better communicate how we create value from an economic, environmental, and social point of view under a robust corporate governance model. We are proud to see that our work is paying off and ESG rating agencies like Sustainalytics rank us among the leading players in our industry. In the meantime, we continue making progress in our operations. For example, in our production of biomethane, which we are already using to power more than 130 vehicles, replacing diesel consumption. Finally, in terms of distribution, we are complying with our policy, always maintaining our debt levels below two times EBITDA. Next week, on November 24th, we will be paying the second installment of our cash dividend. This represents an annual dividend of $35 million or $0.33 per share on top of the $24 million, we have already invested in share repurchases this year. To conclude, I want to thank our team; it is because of your hard work and effort that despite a very challenging start of the year, we are managing to end it with a very positive outlook ahead. Thank you to our shareholders for your continued support. Now, I will let Emilio walk you through the numbers of the quarter.

Operator, Operator

Also, I don't make any noise, but if you need anything, I'm here. Okay.

Emilio Gnecco, CFO

During the third quarter, we recorded $88 million, reflecting a 2% increase compared to the same period last year, while year-to-date, we reached $1 billion, up 7% from the previous year. This growth was primarily driven by improved productivity in our Sugar, Ethanol, and Energy division, allowing us to boost sugar production and achieve strong sales prices, along with increased average selling prices in our Rice and Dairy segments. In September, we finalized the sale of El Meridiano farm for $48 million, which was fully collected at closing. As a result, adjusted EBITDA amounted to $155 million for the quarter, totaling $381 million year-to-date, up 27% and 16% respectively from prior periods. Turning to our production figures, crushing volumes in our Sugar, Ethanol, and Energy business rose 31% year-to-date. This increase in crushing leads to higher production volumes, boosting sales while reducing costs. Achievements in this area were enabled by innovative agricultural practices, such as pre-sprouted seedlings that allow us to cultivate more effective sugarcane varieties. Conversely, total production in our farming division decreased by 29% year-over-year, primarily due to lower yields and a reduced planted area, attributed to the El Nino weather phenomenon. In the Sugar, Ethanol, and Energy business, we reached a record crushing volume of 4.5 million tons during the third quarter, up 20% from last year. This was supported by productivity gains such as a 27% increase in yields to 82 tons per hectare, and a 3% increase in TRS content to 145 kilograms per ton. We allocated 49% of our TRS to sugar, consistent with our strategy to maximize higher-margin product production. Remarkably, we produced more sugar than our industrial capacity, thanks to minor adjustments that alleviated bottlenecks and capitalized on high TRS per hectare in the favorable pricing environment. Total sugar production hit 320,000 tons for the quarter, setting a new record for our mills. A bulk of our ethanol production, 96%, was hydrous, which gives us flexibility to dehydrate it as needed for better market pricing opportunities. Year-to-date, crushing volume totaled 9.6 million tons, marking a 31% increase from the previous year, driven by significantly improved yields and TRS content, along with better sugarcane availability. Our production mix stood at 48% sugar and 52% ethanol. Throughout the first nine months, we focused on maximizing sugar production to capitalize on higher prices, a strategy that saw us shift from ethanol in the earlier part of the year. Net sales reached $190 million for the quarter and $471 million year-to-date, representing increases of 17% and 16% from last year, primarily due to higher sugar sales and prices that offset a decline in ethanol sales. As evidenced, sugar selling volumes totaled 546,000 tons year-to-date, with our strategic focus enhancing average selling prices by 20% year-over-year. In contrast, we intentionally reduced ethanol sales to build inventory in light of falling prices in Brazil due to oversupply. Notably, we exported 29,000 cubic meters of sugar equivalent at an average price of $0.196 per pound. On the energy front, while selling volumes increased 14% year-over-year, average selling prices fell by 9% amid lower energy prices. Looking at our financial performance, adjusted EBITDA for the Sugar, Ethanol, and Energy business reached $115 million and $308 million for the quarter and year-to-date respectively. Both figures saw increases driven largely by higher net sales, though results were somewhat tempered by mark-to-market losses on our commodity hedge owing to rising global sugar prices. As we look ahead, assuming typical weather conditions, we anticipate a 15% increase in 2023 crushing volume compared to 2022, supported by ample sugarcane inventory. This increase will likely lower unit cash costs thanks to better absorption of fixed costs. Market fundamentals continue to underpin sugar prices, which are currently averaging $0.27 per pound. We have a solid opportunity to benefit from this situation, with 11% of our anticipated sugar production for 2023 unhedged, and 82% of our 2024 sugar position still open. Conversely, ethanol prices are currently under pressure at the pump, standing at 62%, due to increased cane productivity and limited storage capabilities. We expect prices to recover toward the end of the harvest season when supply tightens and demand rises. Post third quarter, we sold 25,000 cubic meters of anhydrous ethanol to Europe. Transitioning to our Farming business, we concluded the 2022-2023 harvest with over 800,000 tons of agricultural produce. A decline in yields for most summer crops was noted due to the La Nina effect, though planting for the 2023-2024 season is in progress with a more favorable weather pattern emerging from El Nino. Enhanced moisture levels from recent rains across productive regions in Argentina and Uruguay bode well for summer crop planting and could positively impact the rice planting area and crop earnings in 2024. In terms of our financial performance in Farming and Land Transformation businesses, adjusted EBITDA totaled $47 million for the quarter, a $30 million increase year-over-year, while year-to-date adjusted EBITDA reached $90 million, up 23%. This was largely driven by strong performance in our Rice segment and the sale of El Meridiano farm, offsetting weaker crop and dairy results. Adjusted EBITDA in our crop business was $98,000 and $607,000 for the third quarter and first nine months respectively, primarily influenced by yield declines and cost increases in dollar terms. However, in the rice business, adjusted EBITDA was $11 million for the quarter and $38 million year-to-date, boosted by improved selling prices driven by a favorable product mix and high global prices, which countered the declines in yields and costs. The ongoing export restrictions by India, the leading rice exporter, present opportunities to secure higher prices for South American rice. In the dairy sector, adjusted EBITDA was $6 million, down 33% from the previous year, with year-to-date figures at $23 million, a 4% drop. These results were affected by increased selling prices in fluid milk production geared toward the domestic market. However, cost pressures, particularly related to cow feed, partially impacted our margins. Additionally, we successfully sold El Meridiano farm for $48 million, achieving a 29% premium over the 2022 appraised farmland value. Now, moving to our capital allocation strategy, we generated $141 million in net cash from operations in 2022. Committing to a minimum distribution policy of 40% of that cash, we are set to make a second cash dividend payment of $17.5 million on November 24, equating to approximately $0.16 per share. The first was made on May 24, leading to a total of $35 million in dividends for the year. We also repurchased $24 million in shares year-to-date, representing about 2.4% of the company’s equity. Regarding our debt, our net position of $707 million reflects a 13% reduction from the same period last year and a 17% decline from the previous quarter, aided by our operational cash flow and strategic management efforts. Our liquidity ratio of 1.8 indicates our ability to meet short-term obligations, while our net leverage ratio at 1.5 shows a 0.6 times decrease compared to last year. Lastly, 28% of our capital expenditures for the quarter was allocated to expansion projects, primarily focused on increasing our sugarcane plantation and constructing a second bio-digestion facility in Brazil, which will raise our biogas production converted into biomethane for use in our operations. Furthermore, our Farming division updated its cheese production line at the Morteros facility, enhancing our market reach and reducing waste in production. Thank you for your attention. We are now ready to take your questions.

Operator, Operator

Thank you. We are now open to questions. Our first question comes from Thiago Duarte from BTG Pactual. Your microphone is open.

Thiago Duarte, Analyst

Hi. Hello, everybody. Thanks for the opportunity. Yes, two questions on our side here. The first one is with regards to the evolution of the crushing pace in the Sugar, Ethanol and Energy business and particularly looking at the evolution of the productivity, which has been really strong this year. And so the question is really about whether you see upside risk to the 15% increase in crushing volumes that you have guided for the year? Because it does seem like you have a lot more raw material available to crush than only a 15% increase. And obviously, if you're keeping the 15% increase, whether we should be seeing more cane being carried over into the next crop and whether you could see a bigger crushing next year relative to 12 million tons around this year. So that would be the first question. And the second one is also on the sugar business. We have started to see different players announcing different sorts of investments in order to increase their capacity to produce sugar or to increase their sugar mix as opposed to ethanol. And obviously, with sugar prices trading where they are relative to ethanol, it does seem to make sense even for some mills that historically haven't made much sugar. So, the question is whether you guys are considering the possibility of doing the same? And obviously, whatever you can share with us with that regard would be great to hear as well.

Mariano Bosch, CEO

Hi, Thiago. How are you? Thank you for your question. Renato will take your first question, and then I will take the second one regarding the evolution of crushing and the upside base compared to the 15% we've already guided.

Renato Junqueira Pereira, Sugar, Ethanol and Energy VP

Okay. Hi, Thiago, thank you for your question. I think the weather this year is being very good. We are not seeing periods of excess or lack of moisture in the soil, so this is very good for crushing. Our crushing pace is doing pretty well. And also the perspective of the yields is really good too. So we are confident that we are going to achieve this 15% more crushing compared to last year. Regarding the risk of crushing more than 15%, I think it's possible. But of course, it depends on the weather in the last quarter; the last quarter is always difficult to predict. So considering historical weather patterns, we should be crushing 15% more than last year. And we think that we are going to be in a very good position to crush in the first quarter of next year. I think the sugarcane looks good. It looks very good, so we will be, I would say, plenty of sugarcane to be crushed in a very intense first quarter. So that's the first question.

Mariano Bosch, CEO

And regarding the second question, Thiago, we've been making small investments throughout the year. And as you can see, every quarter, we are increasing the amount of sugar that we are producing in the mix. So we are going to end up with up to 52% of sugar of the total TRS. And so this year, we are very optimistic about achieving these numbers that are above the nominal capacities. When you hear about the other companies building sugar factories, it's because they don't have any sugar factory. We do have sugar factories in all our mills; so what we are doing is increasing marginally the productivity of each one of the factories. So for next year, we can still see an increase in the total sugar production because of this increase that Renato was talking about and because of maximizing sugar since the very beginning. So what we are investing is in making the process of our sugar factory work perfectly well all year round for next year. That’s where we are today regarding the sugar mix investment.

Thiago Duarte, Analyst

Perfect. Thank you. And just a follow-up on Renato's comments. Are you guys ready to sort of, I don't know, a point or guide towards an additional increase in sugar cane volumes into next year. Would that be reasonable or feasible to think relative to this year?

Mariano Bosch, CEO

Yes. We think that reasonably relative to this year, of course, as Renato explained, our sugar crushing is variable according to the weather at the sugar mills, but assuming weather conditions remain normal we should have an increase of at least 5% and maybe up to 10% compared to this year. And that's something that if we continue to do the same things that we've been doing, we can certainly be there.

Operator, Operator

Next question from Larissa Pérez from Itaú BBA. You can activate your microphone.

Larissa Pérez, Analyst

Good afternoon. Can you hear me all right?

Mariano Bosch, CEO

Yes, perfectly well. Hi, Larissa.

Larissa Pérez, Analyst

Thank you, Mariano. Hi, everyone. Thank you for taking our questions, and congratulations once again on the very strong results. I have two questions on the sugar and ethanol side. First, I was wondering if you could provide us some more perspectives on your forecasted destocking base, particularly for ethanol. I mean, in other words, what should we expect in terms of selling volumes for the next quarter? And in that context, I was wondering if you could provide us some color on your storage capacity for the ethanol, or if you currently have enough storage capacity or if you're having to lease third-party storage facilities? And how do you think that compares to your regional peers? My second question would be on capital allocation as well. I remember that a couple of months ago, we discussed the possibility of the company increasing its planted area in Mato Grosso do Sul, given the strong outlook ahead for the sector. And I was wondering if you have any updates on that front that you can share with us right now. I mean, if Adecoagro were to increase its sugarcane planted area, would that involve converting pastureland or would you leave land already used for sugarcane? Something along those lines. Thank you once again and congratulations on the results.

Mariano Bosch, CEO

Thank you, Larissa. Renato will take your first question, and I will take the second one. So Renato, do you want to clarify regarding the selling volumes of ethanol and storage capacity?

Renato Junqueira Pereira, Sugar, Ethanol and Energy VP

Hi, Larissa. We think that the low priority ratio at the pump now and the level of demand for ethanol that you have been seeing is going to increase disparity towards the 7%. Probably, we're going to see this in the next months. So we are taking advantage of all our tank capacity. And also, we are leasing some tanks outside of our mills. So, at this moment, we have approximately 250,000 cubic meters of storage. So we will be gauging the market on how rapidly the price should go up to start selling our volume between the fourth quarter and the first quarter of next year.

Mariano Bosch, CEO

Okay. Thank you, Renato. Regarding capital allocation and the planted area, of course, within the growth projects that we have, we've always indicated that growing the planting area or the amount of sugarcane that we produce in the cluster is probably the most efficient investment that we've been making. And as we've been growing, we are able to lease land mainly from pastureland. One of the advantages that we have is that we don't have competition in sugarcane land with other sugar mills because of our specific location, where the competition is very low. So, in general, when we plant new sugarcane, we convert pasturelands into sugarcane. That's basically what we've been doing. This year 2023, we are planting 8,000 hectares of new planted hectares being specific on answering your question.

Larissa Pérez, Analyst

Thank you. That was super clear. Thank you.

Operator, Operator

For the written questions, I'll hand it over to Vitoria, our Investor Relations Officer.

Vitoria Cabello, Investor Relations Officer

We received that question from Julia Rizzo from Morgan Stanley, and she asks, I would like to ask about next year's crushing and mix. Sugar production could go as much as 320,000 tons for quarters. Basically, is it possible that each quarter, we could see the same record volume of sugar production than we did this quarter?

Mariano Bosch, CEO

Okay. I can’t take directly the question. As Renato explained very clearly, the crushing volume that we are already expecting for 2024 is between 5% to 10% more than this year. And regarding the specific amount of sugar that we can produce this quarter that we are announcing today, we produced this 320,000 tons of sugar, which is an absolute record because of all these investments and adjustments that I also just mentioned. Achieving that level consistently across all four quarters is too challenging, mainly because of the amount of sugarcane that we harvest every quarter. The quarter that we are just finishing is usually the driest of our cycle; being dry means that we can be harvesting and milling all or most of the time. In all the other quarters, it's more difficult to reach that level of crushing days. That’s why I see it as too challenging. Can we do 20% less? Yes, I think we can do 20% less per quarter, but we could repeat the same 320 in the same quarter of the next year. And maybe the second quarter of the year is also a quarter that is usually drier. So, the semester during winter time is more used for having more sugarcane than in the other quarter. That’s basically the answer.

Operator, Operator

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

Mariano Bosch, CEO

Thank you, everyone, for joining today, and we hope to see you in our next upcoming events.

Operator, Operator

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