Earnings Call Transcript - AGRO Q1 2020

Operator, Operator

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro's First Quarter 2020 Results Conference Call. Today with us, we have Mr. Mariano Bosch, CEO; Mr. Charlie Boero Hughes, CFO; and Mr. Juan Ignacio Galleano, Investor Relations Manager. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the Company's presentation. After the Company's remarks are completed, there will be a question-and-answer session. At that 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 and uncertainties and assumptions because they relate to future events, 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 of Adecoagro, and could cause results to differ materially from those expressed in such forward-looking statements. At this time, I'd like to turn the conference call over to Mariano Bosch, CEO. Mr. Bosch, you may begin your conference.

Mariano Bosch, CEO

Good morning and thank you for joining Adecoagro's results conference. Before entering into the analysis of the results of the first quarter of 2020, I would like to firstly use this opportunity to inform you about how our company has been developing under the current conditions. Coronavirus COVID-19 disease has spread across the world at a tremendous speed affecting the health of the general population, and in particular those who are vulnerable. Such circumstances have led to countries imposing mandatory lockdowns and the closing of borders sooner or later. In these difficult times, our number one concern is the safety of our people. That is why very early on, we constituted a special committee, which outlined an action plan to preserve the health of our employees and guarantee hygienic and safe working conditions in all of our facilities. Safety measures and protocols have been specially designed for each activity and have been quickly activated. An intense educational and communication program was put together which contributed to the awareness of the current situation and the development of new habits. We are proud of the commitment of our people and their trust in Adecoagro's approach to the pandemic, and a testimony of it is their willingness to come to work every day. We believe this joint effort and team spirit will help us overcome this tough situation. We, food and energy producers, are part of the selected group of companies that have not stopped operating in those jurisdictions where total lockdown is imposed. The activities we carry out are considered essential, meaning all of our operations are running without any disruption. In our farming business, the price of commodities has been impacted, with soy and corn experiencing a fall, while rice and peanuts, which are the crops in which we are increasing our volumes, remained stable; that’s why Argentina and Uruguay are on budget. In Brazil, the demand and price of ethanol have been significantly affected, causing a negative impact in our sugar and ethanol business. To face this situation, we quickly reassessed our strategy and adapted to the new scenario. Sugar is now the product with the highest marginal contribution. Therefore, we switched our production mix, from full ethanol to maximizing sugar, reaching close to 60% sugar of the total TRS we process. This high degree of flexibility constitutes one of our most important competitive advantages, especially under such a sudden change in market conditions. Just as important as our flexibility is our constant focus on increasing operational efficiencies and maintaining low costs. Being a local producer is in our DNA, and now, more relevant than ever, allowing us to sell our production at a profit even under currency pressure. In addition to our excellent work at an operational level, we have a very healthy balance sheet with an average life of six years for our debt and a 1.3x liquidity ratio as of today. We believe in the importance of having a strong cash position; in this line, we have successfully reduced roughly $40 million from our CapEx plan and cost structure across all of our businesses without compromising production in the coming years. We continue to focus on maintaining an efficient operation and periodically reassess our expenditures to ensure prudent allocation of our capital. In addition to what I just described, we have a year full of challenges ahead of us. However, we feel confident that we have the right teams and that we are following the right strategy to overcome the situation and generate good returns for our existing shareholders. I am convinced that if we remain focused on our low-cost strategy and monitor our liquidity and day-to-day operations closely, we will safely navigate through this storm and seize the results as soon as the world begins to normalize again. Now, I will let Charlie walk you through the numbers of the quarter, which have been very good from both a financial and operational point of view.

Charlie Boero Hughes, CFO

Thank you, Mariano, good morning everyone. As Mariano mentioned, the safety of our people is our main concern. I would like to take a brief moment to walk you through some of the measures we adopted. As well as activating safety measures and protocols tailored for each activity, we have adopted general measures across all our facilities, which include body temperature controls, mandatory social distancing in the workplace, reduction of maximum capacity in lunch and dining rooms, transportation vehicles, increased sanitary barriers and periodic clothing changes and cleaning. We have set aside risk groups, implemented work-from-home policies for corporate office employees, monitored quarantine for travelers and those who have close contact with travelers or symptomatic persons, and have developed an intense training and communication program in collaboration with local authorities. Now let's move to Page 5 for a brief analysis of the rains in Mato Grosso do Sul. As seen on the top charts, rains in our cluster in Mato Grosso do Sul during the three-month period of 2020 were 12.7% below the same period of last year and 28.4% below the 10-year average. The distribution of rainfalls, however, was not even throughout the quarter. January was particularly humid with no recorded rains above the 10-year average level. The beginning of the milling activities in Mato Grosso was delayed until mid-February compared to milling for the first quarter of 2019 and the third day of January due to the availability caused by the adverse weather conditions affecting our platform in 2019. The fact that production stops were continuous and programmed also allowed us to capitalize more costs during the winter harvest period. As can be seen in the bottom left chart, the delay in milling activities resulted in a 48.9% year-over-year reduction in total days and a 21.5% reduction in effective milling days. However, in order to capture the high ethanol prices observed during the quarter and aided by the favorable weather registered in March, we decided to accelerate crushing activities. This strategy is evidenced by the 24.2% year-over-year increase in milling per day and at the same time explains why total crushing during the first quarter of 2020 amounted to 1.3 million tons, only 2.5% below the first quarter of 2019, even after factoring in the shorter harvest period. Please turn now to Page 6 where we'd like to walk you through our agricultural productivity. With the aim of capturing the high ethanol prices while being mindful of securing clean availability for 2020, we maximized the harvest of hectares with no productivity potential, thus allowing the sugarcane with the highest potential to continue growing and recover from the impact of 2019 adverse weather conditions. This resulted in a negative impact on both yield and TRS content. Sugarcane yields during the quarter reached 65 tons per hectare, a 29.6% decrease year-over-year. In terms of sugar content, TRS during the quarter reached 98 kilograms per ton, 8.7% lower compared to the same period last year. The combination of these two effects resulted in TRS production per hectare of 6.4 tons, 35.7% lower year-over-year. Let's move ahead to Slide 7 where I would like to discuss our production mix. As you can see in the top left chart, anhydrous and hydrous ethanol in the Mato Grosso do Sul traded at an average price of $0.161 and $0.152 per pound sugar equivalent, marking a 17.5% and 11.2% premium to sugar respectively. In this context, all our efforts were focused on maximizing ethanol production. As can be seen in the top right chart, during the first quarter, we diverted 95% of our TRS production to ethanol. I would like to emphasize that this high degree of flexibility constitutes one of our most important competitive advantages since it allows us to make more efficient use of our fixed assets and sell the product with the highest margin contribution. As a result of this strategy, during the first quarter of the year, ethanol accounted for 62% of total EBITDA generation in the sugar, ethanol, and energy business, while sugar accounted for 36%. Let’s please turn to Slide 8 where I would like to discuss quarterly sales. As you can see in the top left chart, ethanol sales volumes decreased by 18.9% year-over-year. This is mainly explained by the lockdown that took place in Brazil from the second half of March, along with the lower volumes available for sale due to reduced ethanol production and lower inventories carried from the previous quarter. This was partially offset by average selling prices, which increased by 3.8%, reaching $0.163 per pound, marking a significant premium to sugar. Overall, net ethanol sales reached $52.2 million, 16.8% lower compared to the same period last year. In the case of energy, selling volumes reached 160,000 megawatt hours, marking a 23.4% decrease year-over-year, explained by our strategy to manage supply in light of the low energy prices, which averaged $39 per megawatt hour, 34.3% lower compared to the same period last year. Overall, net sales were 49.7% lower compared to the first quarter of 2019, reaching $4.2 million. Sugar sales volumes during the quarter reached 8.9 million tons, a 72.2% decrease year-over-year due to the full maximization of ethanol production, coupled with lower crushing activities and lower inventories carried from the previous quarter. Average net selling prices reached $0.136 per pound, 9.9% lower compared to the same period last year. As a result, net sugar sales reached $2.8 million, 73.4% lower year-over-year. Finally, to conclude with our sugar, ethanol, and energy business, please turn to Slide 9, where I would like to discuss financial performance. Adjusted EBITDA during the first quarter of 2020 was $40.9 million, 31.2% higher compared to the same period last year. This was mostly explained by the $16.8 million gain from the mark-to-market of our commodity hedge position, which fully offset the reduction in gross margin. Additionally, selling expenses were also reduced, mainly due to lower freight costs as a result of lower sugar sales, lower energy distribution expenses, and particularly due to lower sales taxes paid on ethanol, driven by lower year-over-year volume. I would now like to move on to the farming business, so please direct your attention to Slide 11. During the second half of 2019, we began our planting activities for the 2019 and 2020 harvest year. Planting activities continued throughout early 2020. As of the date of the report, we have seeded a total of 230,000 hectares. Owned croppable area reached 106,000 acres, 1.1% lower compared to the previous season, while leased area increased by 13%, reaching 97,000 acres. Let's move to Page 12 where I would like to walk you through the financial performance of our farming and land transformation businesses. Adjusted EBITDA in the farming and land transformation businesses was $24.7 million, $7.3 million or 22.7% lower year-over-year. The decrease in financial performance is fully explained by the $9.4 million lower results derived from the absence of farm sales during the first quarter of the year, compared to 2019 when Alto Alegre farm was sold. Excluding results from land transformation, adjusted EBITDA for the farming business was $2.1 million or 9.4% higher year-over-year. The rice business generated $15.2 million in adjusted EBITDA due to high average prices in both the domestic and export markets, along with high yields driven by enhanced agricultural and industrial efficiencies. The $1.2 million year-over-year increase was mainly explained by cost dilution following the depreciation of the Argentine peso and lower selling expenses due to higher participation of domestic sales in the sales mix, which do not require incurring packaging costs, among others. The crops business generated an adjusted EBITDA of $6.3 million during the quarter, 15.6% higher year-over-year. This increase is mainly explained by higher selling volumes and the higher mark-to-market valuation of our biological assets fully offsetting lower average grain prices. The dairy business generated an adjusted EBITDA of $3.2 million, primarily driven by higher production and selling volumes, owing to an almost 20% increase in our dairy cow herd and improved efficiencies in our industrial operations. Let’s now turn to Page 14, which shows the evolution of Adecoagro's consolidated operational and financial performance. Net sales during the first three months of 2020 reached $151 million, 1.5% lower year-over-year. This is mainly explained by the lower selling volumes in the sugar, ethanol, and energy business, coupled with the lower prices of sugar and energy measured in U.S. dollars. Adjusted EBITDA totaled $61 million, marking a 4.7% increase compared to the same period last year, or 24.8% excluding land transformation. The $9.4 million lower results in our land transformation business were fully offset by higher adjusted EBITDA in the sugar, ethanol, and energy business, mainly due to higher mark-to-market gains from our commodity hedge position, in addition to currency depreciation that allowed us to dilute costs. To conclude, please turn to Slide 15 to take a look at our net debt position. As you may see in the bottom left chart, our gross indebtedness as of March 31, 2020 stood at $947 million, 2.2% lower compared to December 31, 2019. Our cash and equivalents were at $235 million, 18.9% lower. Net debt amounted to $711 million, marking a 4.9% increase compared to the previous quarter, mainly explained by the higher working capital requirement customary in the first quarter, partially offset by the depreciation of the Brazilian Real, which generated a positive net effect of $10 million. As you can observe, in the first quarter of 2019, net debt amounted to $729 million, showing that the trend of reducing debt year-over-year continues. The net debt ratio reached 2.31 times, 4.1% higher compared to the fourth quarter of 2019. At the same time, our liquidity ratio, which is calculated as cash and equivalents plus marketable inventories divided by short-term debt, reached 1.35 times as of March 31, 2020, 1.15 times if not accounting for inventories. Any value above 1 indicates the full capacity of the Company to repay certain debts with cash balance without raising external capital. We consider our balance sheet to be in a solid position, considering not only the adequate debt levels but also its long-term tenure, with an average maturity of over 6 years. In spite of our non-guidance policy, I would like to take a moment to comment on a few points going forward. In light of the publicly known macroeconomic events, we have been reassessing our cost structure across all our businesses, as well as our capital expenditures. We have put on hold many committed expenses, being mindful that it will not jeopardize productivity going forward. We will continue to closely monitor our day-to-day operations while looking for ways to further enhance efficiencies. On this note, I would like to highlight that our continued focus on being low-cost producers enables us to achieve profitability even under current market conditions. Regarding our liquidity position, we believe that, now more than ever, cash is king. As part of our risk management policy and in anticipation of the maturity of working capital lines, we have successfully rolled $17 million in Argentina into short-term lines and raised roughly another $50 million in Brazil to strengthen our cash position. In addition to this, we are very well advanced in negotiations to raise an additional $100 million. In these uncertain times, the fact that we were able to promptly raise these lines speaks to the banks' confidence in us and how committed we are. Thank you very much for your time. We are now open to questions.

Operator, Operator

Thank you. The floor is now open for questions. Our first question comes from Isabella Simonato from Bank of America. Please go ahead with your question.

Isabella Simonato, Analyst

Thank you. Good morning, Mariano. Good morning, Charlie. Thank you for taking my questions. I’m sorry I joined the call a little bit late, so I'm not sure if you commented about what I'm going to ask. But regarding the $40 million in costs that you mentioned you are planning to save, can you explain a little bit where the sources of savings are? And do you think these will be permanent or at some point those will be reinvested?

Mariano Bosch, CEO

I'm going to take your question and answer it. In most of this $40 million, I think that we are, in some way, delaying a part of the CapEx, specifically in planting. In order to reach the 30 million tons at some point in the five-year plan, we will need to plant these additional hectares. Then there are some industrial investments to do more ethanol in our plants, and those are what we are delaying today. Some of these expenses are ongoing improvements, and I think that we are identifying savings that are not taking into account devaluation. You also have another $40 million or $50 million that comes from cost savings driven mainly by the currency devaluation. That's basically an answer to your question.

Operator, Operator

And our next question comes from Lucas Ferreira from JP Morgan. Please go ahead with your question.

Lucas Ferreira, Analyst

My first question is in Argentina. Have you had any disruptions in terms of logistics for all your businesses given the quarantine? Did you see any impact of the sort? And then in Brazil, with the current exchange rates, could you provide an update on your cost of production in cents per pound, including OpEx? Also, in Brazil, could you comment quickly on the updated mix you're expecting for the quarter? Obviously, you're going to be producing much more sugar, and the expected working capital commitment for these movements towards more sugar.

Mariano Bosch, CEO

Thank you, Lucas, for your questions. So number one, in Argentina, as we speak, we are harvesting under optimal conditions. All our plants are performing at maximum productivity. We are having no issues at all in terms of operations as of today. Of course, we resolved many issues; there were local mayors in different towns who were concerned that we might have problems. But as I mentioned at the beginning, and Charlie reinforced again, we took measures to care for people's safety, and so they realized that we were even more careful than what was required. That's why people feel safe, and because of this, we are able to operate at 100% across all levels of the operation. So I would say that Argentina is currently operating at its best, and on top of that, the harvest is good, so we are collecting well. There have been no issues with any of our people nor with the surrounding towns around our operation. Regarding Brazil, the impact of the FX, there are significant savings, about $50 million due to operational improvements. Most of our costs are incurred in reals, so that is why it directly impacts our dollar costs. The price of diesel is $1, and the reduction in oil prices has made a notable impact. Also, regarding the price of leases, that is affected by currency issues but represents a very small part of our total costs because we own the grain. We're only paying for leasing costs. So that’s the primary impact of FX on our cost of production in Brazil. You also asked about the updated mix. At present, as we indicated, 98% of the TRS we produced was converted to ethanol, while previously we operated at 100% ethanol until the prices changed. So, when we maximize sugar production, we measure it on a daily and weekly basis, and we're doing between 60% to 65% sugar maximization currently in our operations. The working capital requirement aligns with what we've done before, and we expect to carry some ethanol; we sold some ethanol recently and are now storing to find better opportunities. The only ethanol we're selling right now is anhydrous ethanol, so the working capital lease is consistent with our usual yearly workflow; we do not see a huge change in working capital requirements. I hope that covers all your questions, Lucas.

Operator, Operator

And our next question comes from Fernanda Cunha from Citibank. Please go ahead with your question.

Fernanda Cunha, Analyst

Hi, good morning, everyone. Thank you for taking my questions. I just had a follow-up on what was mentioned in the presentation. If I understood correctly, you're going to postpone part of the CapEx extension in the sugar, ethanol business to the end of this crop or for next crop year. I'm just wondering if we are maintaining the initial guidance of the crushing rates for this year, which I recall was around 11.7. If there's any change in that, and how are you looking at roughly what the age of your sugarcane crop is? Do you see any downside risks in case you delay some of the CapEx involved in planting for this year?

Mariano Bosch, CEO

Thank you. Now I will try to clarify. These are the weekly decisions that we are taking. On this CapEx savings, it’s something that we are expecting to continue doing; some of them we've already done or are actively doing. We expect to continue in terms of sugarcane plantation. Depending on how the market evolves and how ethanol prices develop, our planting decisions will change accordingly because planting cane is something that we continuously assess. As of today, we're projecting 11 million tons of total crushing, compared to the 11.7 that we were projecting before. We will be delaying this year, but we are still aligning with what we projected before for next year. We are moving some potential production estimates from this year to the following year. Instead of reaching $30 million in 2022, we might hit that figure in 2023. That is conceptually what we are doing today, delaying a little bit the optimal capacity of sugarcane milling for the next two years.

Fernanda Cunha, Analyst

Thanks for the clarification. Could you let us know what the age of your sugarcane is?

Renato Junqueira-Santos Pereira, Manager

Yes, I am here. We have crushed all the sugarcane at the beginning of the year. The sugarcanes we crushed have the least potential for further development, so if you compare to last year, the usage of those 15 and 16 sugarcane is approximately the same. This year, the age of the total sugarcane is younger than last year, given the planting we did last year, so it's something we do just in the first quarter to give more time to the cane with the most potential to grow. We will be crushing better quality sugarcane in the coming quarters.

Operator, Operator

Our next question comes from Lucas Ferreira from JP Morgan. Please go ahead with your question.

Lucas Ferreira, Analyst

Hey, guys. Just to follow up and clarify something. The plan for crushing 11 million tons is likely less than the previous expectation. Is this because you are leaving some sugarcane to be crushed for next year in the field due to perhaps lower ethanol demands and lower profitability in ethanol, or is it just because you see less availability of cane due to lower planting? Just to clarify.

Mariano Bosch, CEO

Lucas, considering the last year’s below-average rainfall in Mato Grosso do Sul, the situation of cane at the beginning of the year was not ideal. For this reason, we had to reduce crushing at the beginning of the year to allow more time for sugarcane to develop, so it can be crushed in the coming quarters. By doing that, we are going to have more sugarcane for the rest of the year and also next year. Therefore, we expect a better continuous harvest next year compared to the current one. The only change we made is that we are planting 8,000 hectares less sugarcane as part of our cost-saving program, which includes 5,000 hectares of maintenance planting and 3,000 hectares of expansion planting.

Operator, Operator

And ladies and gentlemen, at this point we've reached the end of today's question-and-answer session. At this time, I'd like to turn the floor back over to Mr. Bosch for any closing remarks.

Mariano Bosch, CEO

Now, once again, I just want to thank our teams for being fully committed. We are confident that we are in a good position to go through these difficult times. I would also like to take the opportunity to thank our shareholders for their commitment to our story and their continued support. So, I hope to see you all shortly. Take care.

Operator, Operator

Ladies and gentlemen, thank you. That concludes today's presentation. You may now disconnect your lines. Have a nice day.