Earnings Call
Adecoagro S.A. (AGRO)
Earnings Call Transcript - AGRO Q1 2022
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 2022 Results Conference Call. Today with us, we have Mr. Mariano Bosch, CEO, and Mr. Charlie Boero Hughes, CFO. 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 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 call 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 2022 first quarter results conference. First, before going into the results of our operations during the quarter, I would like to mention that last month our annual shareholder meeting approved a cash dividend distribution of 35 million in two installments, which is approximately $0.32 per share. This is a new milestone that Adecoagro has achieved. In a couple of days, and for the first time in our history, we will be making the payment of the dividends first installment in the amount of $17.5 million. At the same time, we continue buying shares through our buyback program and in line with our distribution policy. Now, getting into the highlights of the quarter, I would like to start with the sugar, ethanol, and energy business. The first quarter is always the most valuable in terms of how much cane is crushed, depending on weather conditions. As we had anticipated in our past conferences, we took advantage of the limited availability of cane and decided not to crush cane all year round, resulting in a short inter-harvest period that finished in mid-March, allowing us to perform maintenance tasks. As a result, the crushing during the quarter was slow. However, I would say the generation stood at solid levels. We were well positioned to profit from the attractive prices, especially of ethanol, thanks to our strategy to maintain our inventories for this time of the year. We ended the first quarter with a full tank of ethanol and captured spectacular prices at the beginning of the second quarter. In April, we sold all of our remaining ethanol inventories and our daily production at an average price of 26.4 per pound of sugar equivalent, which means 35% higher than the price of sugar. With this said, we set a new record of 125,000 cubic meters in only one month. Additionally, maximizing ethanol production allows us to generate more carbon credits. The sale of carbon credits has become a relevant part of our revenue. Since the beginning of 2022, we sold $5 million and expect to make up to $20 million at the end of the year only from the sale of carbon credits. To conclude this segment, I would like to highlight that the results achieved were in line with our expectations considering the weather events. Our crushing forecast for the rest of the year remains unchanged. Good rains in March and April have improved our productivity outlook, and we are confident we will continue to take advantage of the pricing scenario thanks to our strategy of maintaining an open sugar position and our asset flexibility to switch from producing sugar to ethanol and from hydrous to anhydrous as needed. Moving on to our farming and land transformation business, we are currently undergoing harvesting activities for the 2021-2022 agriculture campaign, with results in line with our forecast. We are designing our planting plan for the next crop season. Due to the seasonality of agricultural activities and cash generation, we analyze our operation on an annual basis rather than by quarter. On an annual basis, we expect our operations to achieve results in line with last year. For example, in our crop business, the fight against increasing costs for the products we produce remains very attractive, and we are well-positioned to capture them. We expect this to drive an increase in revenues. In our dairy business, the increase will be driven by our growing production of high-quality milk, which we transform into value-added products demanded in domestic and export markets. In our rice business, we expect a smaller reduction in our EBITDA as the yields achieved were lower than the record high levels achieved last year. In addition, rice prices have not yet matched the increases experienced by the other commodities. To mitigate weather risk, which is part of our business, we have expanded our rice production business into Uruguay with a recent acquisition of Pietra Rice Operation. The transaction will not only provide weather diversification but bring commercial benefits, thanks to the optimum quality of Uruguayan rice, as well as logistical advantages. In summary, we are in an excellent position to benefit from the current context and continue providing high-quality food and renewable energy at a competitive cost. The natural advantages of the regions where we operate allow us to produce more with less. Furthermore, our sustainable production model allows us to recycle byproducts such as waste and manure and transform them into bio-fertilizer used in our own operations. At the time of scarcity of inputs, we are well-positioned to mitigate the overall increase in production costs while also being efficient from an operational and environmental point of view. To conclude, I want to reiterate my gratitude to all our employees and contractors for their hard work and commitment. I am proud of the company we are building together over the past 20 years and excited about the opportunities ahead.
Charlie Boero Hughes, CFO
Thank you, Mariano. Good morning, everyone. Let's start on Page 4 with a brief analysis on the rains in Mato Grosso do Sul. As seen in the top tables, rains in our cluster during the first three months of the year were 31.3% lower than during the same period last year and 18.6% below the 10-year average. Nevertheless, rainfall during March and April were above average, favoring the recovery of our sugarcane plantation. Our cluster in Mato Grosso do Sul typically operates based on our continuous harvest model. This means that, subject to normal weather conditions, we can harvest and crush cane even during the first quarter of the year, which is the traditional inter-harvest period of Brazil's sugar and ethanol industry. As we already knew and had anticipated on several occasions, the adverse weather conditions observed in 2021 caused a reduction in sugarcane availability toward year-end and the beginning of 2022. As a result, in December 2021, we entered into an inter-harvest period until mid-March 2022, when we resumed activities. Thus, our crushing volumes decreased 86.9% year-over-year, reaching 272,000 tons. All of our hectares have already been planted and will be harvested later to allow them to further recover. We expect to make up for the slow start in the following quarters and reach a crushing volume in line with last year. Please jump to Page 5, where I would like to walk you through our agricultural productivity. As we were expecting during the first three months of the year, yields were down 40.9% year-over-year, reaching 44 tons per hectare, whereas TRS per ton decreased 11% to 100 kilograms per ton. As a result, the TRS production per hectare was 47.4% lower than last year. This decline is fully related to the fact that we focused on harvesting reform areas with limited growth potential. By doing this, we were able to produce ethanol and capture attractive prices while allowing areas with greater potential to continue to grow and freeing up area to plant new high-yielding cane, which will be harvested next season. Before turning to the following slide, it is important to highlight that the results achieved are not a reflection of our expectations for the full year. We have a positive outlook in terms of cane availability and productivity, favored by good rains in March and April. This will allow us to increase our crushing pace and continue to take advantage of the positive pricing scenario. Let's move ahead to Slide 6, where I would like to discuss our production mix. In the first quarter of 2022, both hydrous and anhydrous ethanol traded at an average price of 19.1 and 20.108 per pound sugar equivalent, marking a 3.2% and 12.5% premium to sugar, respectively. Thus, we diverted 97% of our TRS to ethanol to profit from higher relative prices. Out of our total ethanol production, 49% was anhydrous ethanol, compared to 11% during the same period last year. 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 profit from higher relative prices. The decline in ethanol production due to lower crushing was offset by higher average selling prices. We were able to capture the increasing prices thanks to our beginning-of-period inventories, which were 56% higher than in the first quarter of 2021 in the case of ethanol, and 75% in the case of sugar. To conclude with this slide, ethanol accounted for 65.7% of total adjusted EBITDA generation in the sugar, ethanol, and energy business, considering other operating income, while sugar accounted for 33.5% during the first quarter of the year. Let's please turn to Slide 7, where I would like to discuss our sales throughout the quarter. As you can see on the right chart, net ethanol sales for the quarter amounted to $57 million, marking a 31.1% increase year-over-year on higher average selling prices, mainly led by anhydrous ethanol. It is important to point out that the attractive prices for ethanol during the quarter were driven by the late start of harvesting activities in the center-south of Brazil, the hike in national oil prices, and a greater-than-expected rebound in hydrous ethanol consumption in March compared to February. Despite the year-over-year reduction in ethanol production, we were fortunate to benefit from the pricing advantage due to our commercial strategy to push forward sales and high inventories. At the start of 2022, we had a carryover of 93,000 cubic meters of anhydrous ethanol and 61,000 cubic meters of hydrous ethanol. Half of these inventories were sold in the first quarter of 2022, while the other 50% were sold during April along with our monthly production. That being said, sales in April marked a new record high for ethanol, amounting to 125,000 cubic meters at an average price of 26.4 cents per pound in sugar equivalent, including 10,000 cubic meters exported. A brief comment on carbon credits: due to the efficiency and sustainability in our operations, which rank among the highest in the industry, we have the right to issue carbon credits every time we sell ethanol. During the first quarter of the year, we sold $2 million worth of carbon credits under the RenovaBio program. In the case of energy, net sales amounted to $2 million, marking a 53.6% year-over-year decrease, fully attributable to our 45.7% decline in average selling volumes, along with a 14.5% decrease in average selling prices due to higher levels of water in reservoirs. Lastly, net sales of sugar during the quarter declined 69.1% year-over-year to net $8 million. This was driven by a 72.5% decrease in selling volumes due to lower production, partially offset by a 12.4% increase in average prices, which reached 20.5 cents per pound. Nevertheless, we believe we are in a good position to continue capturing the increasing prices as we still have unhedged 62% of sugar and 95% of ethanol production related to the 2022-2023 campaign. Finally, to conclude with the sugar and ethanol business, please turn to Slide 8, where I would like to discuss the financial performance. Despite the late start of harvesting activities and thus the low production, adjusted EBITDA during the first quarter was $57 million, in line with last year. These solid results were mainly driven by a $10 million gain in the mark-to-market of our sugarcane, along with a $6 million gain in the mark-to-market of our commodity hedge position. Nevertheless, results were impacted by an increase in costs, mostly driven by fertilizers, fuels, and lubricants, coupled with an appreciation of the Brazilian currency, as well as lower sales registered. I would now like to move on to the farming business. Please direct your attention to Slide 10. We have completed our accounting activities for the 2021 and 2022 campaign in which we have planted a total of 281,000 hectares, marking a 7.4% increase in area compared to the previous season. Soybean, sunflower, and cotton were the crops with the largest increase in planted area. We are currently undergoing harvesting activities for most of our grains. As of the end of April 2022, we harvested 146,000 hectares or 52% of the total area and produced over 600,000 tons of aggregate grains. Let's move to Page 11, 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 amounted to $36 million for the first quarter, marking a 36.6% decline compared to the same period last year. The decline is fully explained by a lower contribution from our rice business to the overall results. Adjusted EBITDA in our rice business reached $8 million, marking a 70.9% decrease compared to the same period last year. The decline is mainly explained by lower yields due to the impact of La Niña in some of our farms, which reduced water availability, and by an 8% year-over-year decline in prices at the moment of harvest. Additionally, higher costs due to inflation in Argentina and U.S. dollars also negatively impacted results. By expanding our rice business into Uruguay, we believe geographic diversification will enable us to mitigate these risks. Going into our crop business, adjusted EBITDA amounted to $18 million, marking a 3.2% year-over-year increase. The main driver was an $8 million increase in gross sales and a $12 million year-over-year gain related to the mark-to-market of our biological assets due to the higher planted area and better prices. Results were partially offset by a loss in the mark-to-market of our commodity hedge position and inflation in U.S. dollar terms, which drove costs and expenses. Moving on to the dairy business, adjusted EBITDA marked a year-over-year increase of 48% to $7 million. Higher results were explained by an increase in both volumes and average prices and our continuous focus on achieving efficiencies in our vertically integrated operations. Again, results were partially offset by higher costs due to inflation in U.S. dollar terms and higher costs of feed due to higher prices of corn and soybean. In the case of land transformation, although no farm sales were conducted, the positive results reflect the mark-to-market of an accounted receivable corresponding to the latest sale of farms in Brazil, which tracks the evolution of soybean prices. Let's now turn to Page 13, which shows the evolution of Adecoagro's consolidated operational financial performance. Our gross sales expanded 17.6% year-over-year to $205 million, whereas our adjusted EBITDA amounted to $86 million, marking a 20.8% decline compared to the same period last year. It is worth highlighting that despite weather challenges, we were still able to capture high prices thanks to our commercial strategy to carry over stocks. As mentioned before, we expect to make up for the lower production volumes in the following quarters and continue to benefit from attractive prices. Lastly, the functional currencies in the regions where we operate may experience changes compared to the U.S. dollar, which is our reporting currency, consequently causing an impact on our FX gain or losses line in our P&L. During the first three months of this year, both of our functional currencies appreciated in real terms, especially the Brazilian real, causing a decrease in our debt level in local currency, and hence a gain in our net income, though it was later neutralized in our adjusted net income reconstruction. For more details on the matter, please refer to Page 3 of our first quarter 2022 earnings release. To conclude, please turn to Slide 14 to take a look at our net debt position. As of March 31st, 2022, net debt amounted to $788 million, $170 million or 27.5% higher compared to the fourth quarter of 2021. This was fully explained by a 13.8% increase in gross debt, along with a 28.5% reduction in our cash position. The first semester has the highest working capital and CapEx requirements as we perform most of our maintenance in the sugarcane industry and our crops are planted. In the second semester, we collect all the cash generated from the sales of our products. Thus, it is important to highlight that our operations should be analyzed annually rather than by quarter, given the seasonality of our cash generation. We expect to reduce the working capital requirements and our indebtedness as we continue with our harvesting activities throughout the second and third quarters. On a year-over-year basis, net debt increased by 7.6%. This is mostly explained by an increase in marketable inventories of $45 million compared to the first quarter of 2021, led by higher prices and higher inventory carries, especially in soybean and corn. We believe that our balance sheet is in a healthy position, not only based on the adequate overall debt levels but also on the terms of our indebtedness, most of which is long-term debt. Our net debt ratio went up to 1.9 times this quarter compared to 1.4 times in the previous quarter, although it did remain steady versus the first quarter of 2021. At the same time, our liquidity ratio, calculated as cash and equivalents plus marketable inventories divided by short-term debt, reached 1.5 times. This clearly shows the full capacity of the company to repay short-term debt with cash balance without raising external financing. Thank you very much for your time. We are now open to questions.
Operator, Operator
Ladies and gentlemen, at this time, the floor is open for questions. If you have a question, please proceed with the operator's instructions. Questions will be taken in the order in which they were received. We do ask that when you pose your question you pick up your handset to provide optimum sound quality. Please hold while we poll for questions. And our first question today comes from Guilherme Palhares from Bank of America. Please go ahead with your question.
Guilherme Palhares, Analyst
Good morning, everyone. Thank you for taking my question. I have two questions, actually. The first one is in the sugar and ethanol business. We are just trying to understand a bit the strategy in terms of the balance of sugar and ethanol this season. What do you expect in terms of the balance of sugar and ethanol, given that the company focused mostly on ethanol in this first quarter? The second question is regarding the costs for the farming business in the 2022 and 2023 season. What do you expect, looking at the current fertilizer prices and the inflation that we are seeing in terms of both labor and other items like diesel and fuel?
Mariano Bosch, CEO
Hi, Guilherme, good morning. Thank you for your question. I'm going to ask Renato to answer the first part of your question regarding sugar and ethanol. Then I will take the one regarding farming and land transformation.
Renato Junqueira Santos Pereira, Executive
Hi, Guilherme. Thank you for your question. We remain very positive on both sugar and ethanol prices. We think that the total TRS produced by Brazil is not going to increase compared to last year. So we expect a lot of competition between sugar and ethanol for the same TRS in the sugarcane, which provides support for both products. It is not clear in the interest of Brazil this year which product we will decide to prioritize. In our case, I think it's a little bit different because we have the tax rebates that give us an advantage to produce ethanol. It's already happened in the first quarter that we produced 97% of ethanol, with just 3% directed towards sugar. We will continue maximizing ethanol, which is one of the reasons we are flexible in terms of hedging to optimize the profitability of our product mix.
Mariano Bosch, CEO
Thank you, Renato. Regarding the second part of your question on the total costs for farming and land transformation, I would like to specifically mention that we are producing in areas where worldwide inputs are the most efficient. Within our sustainable production model, we use very small amounts of inputs relative to what we produce. That's part of the essence of our strategy since we started with it. So while there are increasing prices, such as over 100% in the last two years on fertilizers, our overall cost increase, including herbicides and fertilizers, is around 20% from the 2021 to the 2022 campaign. Looking forward to the 2022 to 2023 campaign, we estimate another 15% increase in costs. So to answer your question directly, we're projecting a 20% increase for 2022 and an additional 15% for 2023. The prices of our different products will follow suit, but they generally are expected to increase significantly more than our costs, with the exception of rice. We are very confident that rice prices will increase as they typically follow the trends of the other commodities, it just takes some time to catch up.
Guilherme Palhares, Analyst
Very clear, thank you.
Operator, Operator
Our next question comes from Thiago Duarte from Banco BTG Pactual. Please go ahead with your question.
Thiago Duarte, Analyst
Thank you. Good morning, Mariano, Charlie, Renato, everyone. I have one question for Renato on the sugar, ethanol, and energy business. I am trying to build on how you expect the same amount of cane crushing this year versus last year. I'm curious how that should take place in terms of harvested area and yields. Last year, your team managed to maintain the crushing volume despite lower yields due to having a larger harvested area. So, I am wondering how you see the area versus yields playing out this year to achieve a similar volume of roughly 11 million tons of cane.
Mariano Bosch, CEO
Good morning, Thiago, and thank you for your question. Renato, would you like to address that?
Renato Junqueira Santos Pereira, Executive
Yes. Hi, Thiago, and thank you for your question. We think that the yields this year are going to be between 5% and 7% higher than last year. There will be fluctuations throughout the year. As we mentioned, the first quarter yields were very low because we prioritized harvests in areas that needed to be replanted. 80% of the areas harvested in the first quarter were less than 50 to 60 tons per hectare. We think that sugarcane yields will improve significantly in the second semester, as there will be no residual impacts from last year's frost. We also experienced very good rains in March and April, which will help yields for the second semester. We planted a lot of sugarcane that will be harvested in the second semester, so there will be a marked difference between the first and second semester. We anticipate having a challenge crushing all the sugarcane, as we started the campaign later. Crushing will be a key focus in the second semester, but we are confident we will achieve a total crushing that is likely higher than last year's levels, especially in the third and fourth quarters, as we will harvest areas that were previously used for planting.
Thiago Duarte, Analyst
If I may add a follow-up question on that, how do you see your costs playing out this year? I understand that these better yields will be very positive in diluting your costs; however, there is also this cost inflation across the whole industry. A bit of commentary on your unit costs or costs per ton or per hectare this year would be great.
Renato Junqueira Santos Pereira, Executive
I think the big increases in costs happen during the harvest phase. Initially, we observed a cost increase of approximately 40% for this year. We believe that costs will increase around 10%, largely aligned with the inflation we are seeing in Brazil, not considering the effects of exchange rates. Certainly, improved yields will help dilute those costs we are anticipating. We believe we are in a strong position because we are producing a significant amount of bio-fertilizer, with approximately 48% of our fertilizer needs produced from our own products. We are essentially self-sufficient in fertilizers, which is an important issue in the Brazilian market today. Overall, we anticipate a cost increase of approximately 10%, aligned with inflation.
Thiago Duarte, Analyst
That's very helpful. Thank you, Renato and Mariano.
Operator, Operator
Our next question comes from Lucas Ferreira from JP Morgan. Please go ahead with your question.
Lucas Ferreira, Analyst
Thank you very much. My first question is also for Renato. Can you discuss your position with regards to hedges, especially for sugar? What's your outlook there? Should you think you should be speeding up the hedging a little bit considering India is expected to have a very large crop ahead? Are you still comfortable keeping your hedges at these levels, or should you be speeding up hedging? Can you discuss this commercial strategy for both ethanol and sugar? The second question is more general and probably for Charlie: can you discuss the CAPEX expectations for the full year for both sugar and ethanol and crops? How much do you guys expect to spend in terms of maintenance and expansion CAPEX for this year?
Mariano Bosch, CEO
Thank you, Lucas. Renato, do you want to address the first part of the question?
Renato Junqueira Santos Pereira, Executive
Yes. Thanks for the question, Lucas. As I mentioned earlier, we expect very good competition between sugar and ethanol for the same TRS in sugarcane, so we are positive about both products. We want to maintain flexibility to use our position as effectively as possible. In the first quarter, we demonstrated how this flexibility can help. We produced 97% ethanol. Regarding India that you mentioned, I believe everyone is already anticipating India exporting 9 million tons of sugar. Even in this scenario, Brazil needs to produce around 32 million tons of sugar to keep the market balanced. We are concerned that Brazil may not produce this amount, creating a favorable environment for both sugar and ethanol.
Mariano Bosch, CEO
Thank you, Renato. Regarding CapEx expectations, today our priority is complying with our distribution policy. As you know, we have committed to distributing at least 40% of net cash from operations, which amounts to $152 million. Hence, we will distribute about $55 million in dividends and the rest in buybacks. While sticking to this priority, we will continue with our ongoing growth projects. Our expansion growth primarily stems from ongoing organic growth in sugar and ethanol through planting, with additional investment in various parts of the operation that generate significant synergies and return above 25% IRR. Maintenance CapEx will likely remain in line but affected by inflation. On maintenance CapEx, it will fluctuate based on foreign exchange rates, but overall expectations are consistent with last year's levels.
Lucas Ferreira, Analyst
Thanks, Charlie. But just a quick follow-up: do you have at least a range of how much total expansion CapEx you expect this year in million dollars?
Charlie Boero Hughes, CFO
We should expect it to be similar to what we had last year.
Operator, Operator
Once again, if you would like to ask a question, please follow the operator's instructions. Our next question comes from Christian Audi from Santander. Please go ahead with your question.
Christian Audi, Analyst
Thank you so much. Hello, everybody. I wanted to go back for a second to the capital allocation topic. You mentioned very clearly that your priority is dividends and buybacks. You also touched on CapEx expansion and maintenance. What I wanted to ask is, regarding CapEx growth, is there anything you are seeing in terms of M&A that could be considered this year? Second, on the debt side, given all that’s happening in the market, what level of net EBITDA would you feel comfortable with going forward? Lastly, can you elaborate on how you prioritize your capital allocation among dividends, CapEx, and M&A?
Mariano Bosch, CEO
Thank you, Christian, for your question. First, regarding debt levels, we feel comfortable maintaining our net debt below two times EBITDA. This is a commitment we have upheld. Therefore, you shouldn't expect to exceed this threshold. Today, we anticipate continuing with smaller synergy projects across our businesses, but I do not foresee any M&A outside the focus of our four lines of business. We haven’t seen any M&A opportunities that we consider attractive for the creation of long-term shareholder value.
Christian Audi, Analyst
Understood. On the CapEx growth front, can you talk about any new products you may be looking into as potential areas of growth, such as second-generation ethanol or biogas?
Mariano Bosch, CEO
We've consistently mentioned our work on our sustainable production models. With this model, we are exploring ways to enhance sustainability in our operations. In terms of fertilizers, we are increasing the amount of organic material we transform into bio-fertilizer and are also working on utilizing methane from the anaerobic digestion process to generate energy. This could replace diesel in our operations and potentially produce additional electricity. Our aim is to increase sustainability and generate more revenue from our current system.
Christian Audi, Analyst
Great. One last question—corn-ethanol: is that something you find interesting from a strategic standpoint?
Mariano Bosch, CEO
Thank you for your question, Christian. We have studied the idea of corn-ethanol numerous times. We believe the concept is valid; however, in our specific region, we find that sugarcane is considerably more efficient. The core of our strategy is utilized to derive ethanol from sugarcane, staying true to our sustainable production model.
Christian Audi, Analyst
Lastly, regarding the anticipated performance for dividends, it appears you may potentially pay extraordinary dividends based on your strong cash generation amidst high sugar and ethanol prices. How do you think about that in terms of distribution in addition to the 40% that your formula indicates?
Mariano Bosch, CEO
We have been consistently committed to distributing at least 40% of our net cash flow from operations. In 2021, we distributed 51% of our net cash from operations from the previous year. It is possible to expect more sometime; however, this will depend on capital expenditure opportunities and ensuring we remain below the two times net debt-to-EBITDA ratio.
Christian Audi, Analyst
Perfect, thank you so much.
Operator, Operator
Ladies and gentlemen, this will conclude 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
Thank you everyone for participating in the call. See you at our upcoming event.
Operator, Operator
Thank you. This concludes today's presentation. You may now disconnect your lines.