Earnings Call Transcript - AGRO Q3 2024

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 2024 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 Mrs. Victoria Cabello, Investor Relations Officer. 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 section. 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, 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 2024 third quarter results conference. We have already committed $96 million to shareholder distribution. This includes $35 million in cash dividends, on top of the $61 million that we have already invested in share repurchases year-to-date. As we distribute cash to shareholders, we also continue investing in attractive growth projects such as growing the size of our sugarcane plantation in Brazil and strengthening our rice operations. Moreover, during the quarter, we repurchased $84 million of our global notes, thus reinforcing our balance sheet structure. Moving on to the results, consolidated adjusted EBITDA during the quarter reached $111 million, whereas year-to-date amounted to $341 million. Starting with our rice operations, all the investments made over the years, such as the acquisitions of the assets in Uruguay, seed genetics, machinery, all these have materialized into record results. We have become a relevant player within the sector with a quick speed of reaction to respond to market opportunities. In Dairy, our continuous focus on enhancing efficiencies across the whole value chain, together with the development of higher value-added products, are the main drivers of growth in results. Now we are in the middle of the planting activities for our 2024-'25 campaign, which are being conducted with good soil moisture conditions, and at a good pace for both crops and rice businesses. We have our teams fully focused on this and we are in an excellent situation to maximize yields in all our productions for the next harvest season. Now, let's move into our Sugar, Ethanol and Energy business. Despite the challenging weather conditions, our crushing volume remains ahead of the previous year. More relevantly, we accomplished a 55% sugar mix during the quarter, thanks to our industrial efficiencies. We continue to expect a slight year-over-year increase in crushing and consequently, a new record in sugar production. Furthermore, we were able to secure new areas at attractive terms and even plant cane during the optimal window, thus enhancing its productivity potential for next harvest seasons. Before passing the word to Emilio, a quick update on ESG. In line with our energy transition strategy, we secured attractive financing from FINEP to construct two biodigestors that will enable us to increase our biomethane production five times by 2027. This, in turn, will enable us to cut down carbon emissions while reducing costs. To conclude, I would like to thank our teams. Despite these challenging events, we continue generating good returns and value for our shareholders, thanks to their hard work and dedication. Now, I will let Emilio walk you through the numbers of the quarter.

Emilio Gnecco, CFO

Thank you, Mariano. Good morning, everyone. Let's start on Page 4 with a summary of our consolidated financial results. Gross sales increased to $457 million during the third quarter, while on an accumulated basis, were up to over $1.1 billion. This was mostly explained by higher volumes sold of most of our products, which in turn fully offset the lower prices for some of the commodities that we produce. However, adjusted EBITDA reached $111 million during the quarter, marking a 29% decline versus the prior year, mostly due to an uneven year-over-year comparison. During the third quarter of 2023, we completed a farm sale which booked $30 million in adjusted EBITDA, whereas no farm sales were conducted during the current period. Excluding this, our quarterly performance was down by 12% versus the same period of last year, explained by lower results in our Sugar, Ethanol and Energy business. On a year-to-date basis, adjusted EBITDA stood at $341 million. Despite an outperformance of our rice and dairy businesses, lower results were driven by the aforementioned decline in our 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 6% 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, after having experienced better weather conditions throughout our latest harvest season. Let's move to Slide 7, with the operational performance of our Sugar, Ethanol and Energy business. Crushing volumes during the quarter amounted to 4 million tons, representing a 10% year-over-year decline. This was fully explained by the dry weather experienced during the first nine months of the year, which translated into a reduction in yields and thus into lower crushing. Nevertheless, this was partially offset by an increased sourcing of third-party cane, thanks to opportunities that arose from nearby areas. On an accumulated basis, total crushing volume reached 10.2 million tons, 6% higher compared to the same period of last year, due to greater sugar cane availability given our expansion planting activities and third-party cane. 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 better margins. If required, we can always 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 $227 million during the quarter, while year-to-date it reached $502 million. As you can see on the top-left chart, the increase in volumes sold of sugar fully offset the decline in prices. As explained in prior releases, lower sugar prices have come down versus the levels seen during 2023 due to a stronger pace of milling in Brazil, resulting in higher sugar supply. The same trend can be seen for our ethanol sales conducted during the respective periods. We strategically sold our production to profit from spikes in price, even though selling prices in US dollar terms continue to be below the previous year on greater production. Consequently, we continue holding onto our ethanol inventories to profit from better prices in the upcoming quarters. Our stocks represent 49% of our year-to-date ethanol production. Moving on to energy, we focus 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 sold over 400,000 reservoirs at an average price of $15 per reservoir, yielding a total of $6 million in net sales. 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 $100 million during the third quarter and $259 million on a year-to-date basis. Despite presenting an increase in net sales, as well as a year-over-year gain 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 on lower expected yields, coupled with lower sugar and ethanol prices. 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 rest of the year, we forecast a slight increase in our annual crushing figure versus 2023. Precipitation received throughout October has enhanced the recovery of the cane that will be harvested in the next quarters. From a commercial point of view, sugar prices peaked by the end of the third quarter due to a decline in Brazil's cane productivity on the back of the aforementioned dry weather. Furthermore, fire events reported by the end of August in key producing states added pressure to the country's sugar production expectations. Consequently, we foresee a tighter global supply and demand scenario for the coming months, which is why we still have a portion of our expected 2024 sugar production hedged, and our 2025 production remains open. In the case of ethanol, demand continued strong, given its attractive price versus gasoline, 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 improve due to the current low parity at the pump, coupled with the beginning of the industry's inter-harvest season. To finalize with the Sugar, Ethanol and Energy business, we are using our stored bagasse to produce energy to sell in the market as prices recover due to low levels of water reservoirs. Now, we would like to move on to the farming business. Please go to Slide 12. By the end of October, we concluded harvesting activities related to our 2023-2024 harvest season and produced over 1.1 million tons of agricultural produce. As of today, we are undergoing planting activities for our 2024-2025 campaign with a weak to moderate La Niña weather forecast until the year end. It is essential to highlight that for correct crop development, rainfalls must occur from January onward as that is the moment when most of our crops define their yields. Furthermore, we were able to expand our winter crops area to over 45,000 hectares in this new season, due to better soil moisture conditions. In the case of rice, we were able to develop a new area in the Northeast region of Argentina. In Dairy, we continue enhancing efficiencies in our stores, which are already at full capacity. At the industry level, we are working on product development for the domestic and export markets, while expanding our presence across different price tiers with our consumer product brands. On the following Page 13, we present the financial performance of our Farming business. Adjusted EBITDA for the Farming business totaled $17 million during the quarter, whereas year-to-date, it amounted to $99 million. Starting with our Crops segment, adjusted EBITDA amounted to $2 million in the third quarter compared to $29 million booked during the prior year, as the latter fully reflects the sale of a farm conducted in September 2023. On a year-to-date basis, adjusted EBITDA totaled $22 million, which includes the sale of La Pecuaria farm conducted in April 2024. Focusing solely on our crops results, the segment performed better than in 2023, as we saw a significant year-over-year recovery in production. However, results were negatively impacted by lower international prices for our main products, higher costs in US dollar terms, and lower-than-expected corn yields due to the impact of spiroplasma. Moving on to rice, despite increasing sales and better prices, lower adjusted EBITDA during the quarter was mainly explained by higher costs in US dollar terms. On an accumulated basis, adjusted EBITDA reached $51 million, marking a new record for this segment. Results were driven by year-over-year gains reported in the mark-to-market of our biological assets on higher prices and higher planting area. Lastly, adjusted EBITDA in our dairy segment totaled $8 million during the period, whereas year-to-date reached $26 million. Results were positively impacted by higher sales and higher prices, as we improved the mix of higher value-added products and maximized the production of fluid milk for the domestic market. Let's now turn to Page 15, where we would like to present our capital allocation strategy. According to our distribution policy, we must distribute a minimum of 40% of the cash generated during the previous year via a combination of cash dividends and share repurchase. As of today, we have already committed $96 million to shareholder distribution, $26 million more than the minimum stated in our distribution policy. In terms of dividends, on November 27, we will make our second cash dividend payment of $17.5 million, which represents approximately $0.174 per share. The first installment was paid on May 29 in an equal cash amount, resulting in an annual cash dividend of $35 million. In addition, we have already repurchased over $61 million in shares under our buyback program, which represents approximately 5.7% of the company's equity. Going forward, we expect to continue with our share repurchase. Please turn to Slide 16 for a broader view of our debt position. Net debt amounted to $646 million, marking a 9% decrease compared to the same period last year. Throughout the year, we have been diligently reducing our gross debt and cash position in the most efficient manner while looking for opportunities to finance our operations at the lowest cost. As shown in our financial figures, this was achieved without distending our distribution policy and growth projects. As of September 30, 2024, our liquidity ratio reached 2.6 times, showing the company's full capacity to repay short-term debt with its cash balances, whereas our net leverage ratio was 1.5 times, consistent with the same period of last year. On the following slide, we describe our CapEx program. Expansion CapEx represented $26 million during the quarter and $72 million on an accumulated basis. In Brazil, we continue increasing our sugarcane plantation and investing in our biogas unit in the Ivinhema mill, where our biomethane production takes place. In our farming business, investments include the acquisition of agricultural machinery, such as scissors and harvesters, as well as the development of croppable area for rice production and the construction of a new warehouse for our dairy products at our Chivilcoy dairy processing facility. Thank you very much for your time. We are now open to questions.

Operator, Operator

Our first question comes from Bruno Tomazetto with Itau BBA.

Bruno Tomazetto, Analyst

Good morning, everyone. Thank you for the presentation. I would like to discuss with you the parity of ethanol to gasoline prices. We see most of the industry now focused on the buildup of inventories to better capitalize on higher prices during the intercrop period. But at the same time, we also see a higher than expected supply of ethanol related to sugar and ethanol operators in the Central South region, not being able to achieve sugar maximum production, right? So my question is, how to think about these two different dynamics impacting the parity to gasoline and what's Adecoagro's most updated view on the timing intensity for this, not only for Q4 but also for early 2025? And also, if I may ask a second one on the sugar prices. We understand that impacts on Brazilian sugar production were mostly limited to regions affected by fires, which is obviously not in your case, but you could benefit from higher sugar prices if we see further impacts on the industry struggling to produce sugar in the next harvest as well, right? So we would like to understand what Adecoagro is expecting in terms of potential impacts from these fires for sugar production in the upcoming year? And also, how much do you think that's already priced into current sugar prices? That's it. Thank you.

Mariano Bosch, CEO

Thank you, Bruno, for your question. Renato will take the answer. Renato?

Renato Pereira, VP of Sugar, Ethanol and Energy

Thank you for your question, Bruno. Starting with ethanol, we believe that the demand for ethanol remains very high. Hydrous demand is nearly 2 billion liters per month. When you include hydrous demand, the total reaches 3 billion liters each month. The parity rate at the pump is still quite low at 65%, which supports ethanol consumption. Comparing ethanol stocks to the same time last year, the current stocks are similar despite much higher demand today, indicating a tighter start-to-use relationship. Additionally, the intercrop period this year is expected to be extended due to weather issues in the Center South of Brazil. As a result, we anticipate that ethanol prices will respond—it's already happening—and we expect it to reach or exceed the 70% parity in the latter part of this year and the first quarter of next year. We are maintaining our inventories to sell ethanol during this time to capture higher prices. Regarding the impact of the fire on sugar, we believe it will affect next year as well. The fire primarily occurred in August and September, which means that the sugar cane harvested then will not have grown as expected. Consequently, the sugar cane's development will be delayed for next year. We expect that in the first half of the year, the Brazilian mills in the fire-affected regions will experience significantly lower yields than usual. As a result, the market will still rely on Brazil in the first half of the year, and conditions will remain tight. This leads us to believe that the future curve should be more flat, and we are taking the opportunity to hedge the remaining part of our production.

Bruno Tomazetto, Analyst

Thank you. Very clear, guys. Thank you.

Operator, Operator

Next question is from Isabella Simonato with Bank of America.

Isabella Simonato, Analyst

Thank you. Good afternoon, everyone. My question is about yields. In Argentina, you mentioned that planting has started, and the expectation is for relatively normal weather next season. Can we begin to anticipate that yields will improve year-over-year? Also, could you provide some insight into the crop mix? It's clear that you've reduced exposure to corn, which I assume is related to the challenges faced this year. Additional context on the crop mix would be appreciated. Thank you.

Mariano Bosch, CEO

Thank you, Isabella. I am going to take your question. Regarding yields in general, last year was a challenging year, and we are starting this season under excellent conditions. So in general, we are starting under much better conditions than what we started last season. Assuming normal weather from now onward, we can clearly expect better yields than what we had last year overall. Then getting into the details of our distribution within the crops, this year, we are increasing our focus on soybeans compared to corn, but even more relevant than that, thinking about how we expect prices to move in the future. Peanuts are the ones we are growing more, and we are starting in even better leased land. We expect better yields for next year. Peanuts are becoming a very relevant crop, and as Europe is the main buyer of peanuts from Argentina, we anticipate a lower decrease in prices due to the quality of the Argentine peanuts, which will be sold to this market that is not reducing the price. We also have an increase in sunflower, which is playing a different role than the other commodities, given the increase in the price of oils, making sunflower more favorable than previously. Therefore, we're also increasing that crop. Finally, the most relevant crop that we have today, as you can see in our reports, is rice. In terms of rice, although we expect that the average of rice worldwide is going down, we produce special varieties because of our seed genetics. Our fully integrated model for rice is giving us a competitive advantage of reaching special clients where we can defend our price better. We've also been developing significant CapEx in rice, enhancing both production and processing capabilities, which is helping us maintain prices. So we see record levels in terms of EBITDA, and we can project that into the future as well. Lastly, regarding all these allocations of different crops within our farming system, it's important to understand that dairy is also growing, and the whole processing of dairy is expanding, supported by higher sales prices, helping us maintain or increase prices for what we sell. That's basically a quick summary of how we're planning this new harvest season and the main movements within our farming crops.

Isabella Simonato, Analyst

That's very clear. Thank you.

Operator, Operator

Our next question comes from Matheus Enfeldt with UBS.

Matheus Enfeldt, Analyst

Hi, good morning, Mariano, Emilio, Renato, Victoria. I’m glad to be here and congratulations on the results. My first question is about capital expenditures. Adecoagro has been spending a bit more this year, especially on expansion for sugar and ethanol. I’d like to understand how this impacts your timeline. It seems that 2024, 2025, and 2026 will likely see higher capital expenditures compared to the previous years. My question is how you see this progressing and what the appropriate level of spending could be if there’s a possibility to approach $300 million to expedite some growth opportunities. That's my first question. My second question is a follow-up to the previous one; while the message on prices and productivity is straightforward, how are you observing the development of costs as well? Thank you.

Mariano Bosch, CEO

Okay. Thank you, Matheus, for your question. Number one, and a quick answer regarding cost development. I think this is a very important question because we've always aimed to develop sustainable production models in the four business lines or segments that we have, focusing on being the lowest-cost producer. For us, costs are very relevant here, and this approach of being the lowest-cost producer helps in scenarios where prices or commodity prices are going down. This is an important strategy. As you might not see it yet in these reports because we are comparing '24 to '23 numbers, but when we plan our next campaign and as we are planting today, we are reducing costs, and we can assume yields in line with our historical averages. We anticipate a reduction in cost of production going forward. That is something we expect and are working towards achieving in the near future. Now, regarding your question on CapEx, I'd like to reiterate what Emilio just mentioned about capital allocation. When we think about CapEx, we always consider it within the overall context of capital allocation. As you can see, the first thing that we will maintain, and we are being very strict about, is compliance with our policy of distributing at least 40% of net cash from operations of the previous year. As you can see in 2024, we are distributing more than that, returning almost 10% of the total equity of the Company. Clarifying this and recognizing that it remains a priority, we are pleased to see growth opportunities across all segments we have. In terms of the CapEx increase, not significantly, but we are investing a bit more from '23 to '24, primarily in the sugar and ethanol segments, where we've been more stable and clear in communication about this growth. We are looking at about $50 million per year in investments. 2024 and 2025 are key years for this segment. One of the main growth initiatives is our biomethane production that we referenced before, financed at very attractive rates through FINEP. The returns here are projected between 15% to 20%. We are also seeing good expansion opportunities in sugarcane planting, remaining in regions with promising leases. We are increasing milling rates at a relatively low cost. In rice and dairy, we see profitable investments in seed genetics, machinery, and processing capabilities, which contribute to lower costs and higher sales prices. Overall, these investments ensure good IRRs between 18% to 25% while remaining focused on operational efficiency.

Matheus Enfeldt, Analyst

That's clear. Super. Thank you.

Operator, Operator

We received a question from Larissa Perez at JP Morgan, but it was already addressed during Isabella Simonato's question. This concludes the question-and-answer section. I would like to turn the floor back to Mr. Bosch for any closing remarks.

Mariano Bosch, CEO

We would like to thank you all for joining the call and for the support we've been receiving. We hope to see you in our upcoming events.

Operator, Operator

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