Earnings Call Transcript - AGRO Q1 2023

Operator, Operator

Good afternoon, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro's First 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 through 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 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 affect the future results of Adecoagro and could cause 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 first quarter results conference. Before going into the results of our operations, I want to address every factor on distributions. Last month, our Annual Shareholder Meeting approved a total cash dividend of $35 million to be paid during 2023. This part of our distribution policy represents approximately $0.32 per share, equivalent to a 4% dividend yield. Those dividends will be distributed in two equal installments of $7.5 million each in May and November. In addition to this, we continue buying shares under our buyback program. And this year, we have already repurchased 1.1 million shares, equal to 1% of the company's equity. To comply with our distribution policy, during the rest of the year, we must repurchase at least an additional $30 million in shares. Now let's go into the highlights of our operations. Consolidated adjusted EBITDA during the quarter reached $89 million, slightly higher than the previous year, although we experienced the worst growth of the last 100 years in Argentina and Uruguay. I think this achievement shows the importance of our diversification. Talking about diversification, we have four different segments: crops, rice and dairy in Argentina and Uruguay that suffered the downturn in different manners—from a huge impact in crops to almost none in rice and dairy. And one segment in Brazil, our sugar, ethanol and energy that is doing excellently. Now starting from the most affected segment, our crop business simply broke even compared to the $18 million generated last year. We are in the middle of the harvesting activities, and we expect a 30% to 40% reduction in yields compared to the previous year. The good news is that the effects of the drought are over. As of July this year, we will start our new agricultural campaign with a forecast of El Nino, which means good rains. In the rice business, we completed harvesting activities with only a 6% reduction in yields, but better prices and logistics resulted in better margins. We expect to continue to benefit from this. In the dairy business, we continue in line with the previous year with some increase in productivity, offset by higher costs of feed. In Brazil, adjusted EBITDA for our Sugar, Ethanol and Energy business increased by 34% year-over-year. Cane availability was excellent and productivity indicators almost doubled compared to last year. Because of this, we crushed five times more cane, and we are one of the few players to produce sugar during the traditional inter-harvest period. The outlook for this segment looks very promising and the price scenario is very constructive. For instance, sugar prices have increased by 30% since the beginning of the year and are now trading above $0.25 per pound. This represents 30% premiums to hydrous ethanol and over 15% to anhydrous ethanol. Fundamentals are supportive to sugar prices going forward, and we are uniquely positioned to profit from this as we have more than 50% of our sugar still hedged. Another development we are very excited about involves the production of renewable energy from vinasse. After more than 10 years developing the technology to produce biogas, we have reached stability in production and its conversion into biomethane. We recently became the first player to run its vehicles on biomethane fully produced from vinasse, effectively replacing diesel consumption. We are building a second biodigester which will double our biomethane production, resulting in additional cost savings and improving our carbon footprint. Fully scaled up, this project has the potential to replace our entire diesel consumption of more than 50 million liters. This process technology will also open doors to new business opportunities. We are very proud of this achievement, which shows the benefit of our circular business model and is a clear example of the innovative approach we implemented in our different business units. To conclude, I want to congratulate our team for constantly working towards becoming the most efficient and sustainable producer of food and renewable energy. We have a year full of challenges ahead of us, but also great opportunities. I feel confident that if we continue to focus on our day-to-day operations, we will continue to generate good returns and value for our shareholders. 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 for the quarter. Gross sales amounted to $247 million during the first quarter, making a 20% increase year-over-year. This was explained by both our operational and commercial decision to favor sugar production to capture the price premium over ethanol. In addition, our Rice operations reported a $22 million increase in revenues on account of higher selling prices due to a better mix of higher value-added products as well as to higher book volumes sold. Please turn to Slide 5 for a broader view of our consolidated financial figures. As you can see on the right chart, adjusted EBITDA totaled $89 million, 3% higher than the previous year. This is explained by an outperformance of the sugar, ethanol and energy business, driven by ample sugarcane availability, thanks to the expansion planting activities conducted throughout the last years, coupled with solid productivity indicators. Thus, its greater performance fully offset the decline reported in our farming division mainly in crops, driven by the effects of an unprecedented drought in Argentina, in addition to higher costs. Let's move ahead to Slide 7 with our operational performance. In the first quarter of 2023, crushing volumes amounted to 1.5 million tons, which is 1.2 million tons higher year-over-year. This was mostly driven by greater cane availability, which enabled us to resume our continuous harvest model and supply the market during Brazil's interharvest period. Agriculture productivity indicators such as yields presented a year-over-year improvement from 44 tons per hectare to 73 tons per hectare in the quarter, whereas TRS content increased from 100 kilograms per tonne to 111 kilograms per tonne. During the first three months of the year, on average, sugar traded at $0.208 per pound, offering a premium of 8% to anhydrous ethanol and 19% to hydro ethanol in Mato Room, which traded at $0.193 per pound and $0.175 per pound sugar equivalent, respectively. Consequently, we divided as much as 46% of our TRS to sugar production, in line with our strategy to maximize the production of the product with the highest marginal contribution, taking advantage of the high degree of flexibility of our mills. Within our ethanol production, 71% was anhydrous, and to further profit from the premium that this ethanol commanded, we dehydrated over 30,000 cubic meters of hydrous ethanol stored in our tanks. Let's please turn to Slide 8, where we would like to describe our sales throughout the quarter. Net sales amounted to $95 million, making a 39% increase compared to the same period of last year. This was driven by an increase in sugar sales on higher production, which fully offset the year-over-year reduction in ethanol sales. As you can see on the left chart above, selling volumes of sugar amounted to 106,000 tonnes, as our mix decision favored sugar production to capture the price premium over ethanol. It is worth highlighting that 94% of our sugar sales were VHP sugar, which presented a 9% increase in its selling price reaching $0.22 per pound. In the case of ethanol, we reduced our volumes sold of hydroethanol due to the year-over-year reduction in its selling price and built inventories, which can be further dehydrated. On the other hand, volumes of anhydrous ethanol increased by 3% compared to the previous year, given our flexibility to export to Europe and to sell at the local market, depending on market opportunities. This is so since we have the necessary certifications and industry capacity to meet product specifications. Within the volumes sold, 7,000 cubic meters were exported at an average price of $0.203 per pound of sugar equivalent. Average selling price of energy increased by 68% compared to the prior year, explained by our long-term energy contracts, even though selling volumes were down 10% due to our decision to use part of Albea gas fuel to dehydrate hydro ethanol instead of producing at low prices. Regarding Cabo credits, we sold 146,000 Cbios, 9% higher than the previous year at an average price of $16 per survive. Please go to Page 9, where we would like to present the financial performance of the Sugar, Ethanol and Energy business. Adjusted EBITDA during the quarter was $77 million, 34% higher year-over-year. This was explained by an increase in sales and by an $11 million year-over-year increase in the mark-to-market of our harvested gain on higher pressing volume. Results were partially offset by higher costs due to the increase in production, coupled with higher costs of inputs as well as freight. It is worth mentioning that costs on a per pound basis reported a decrease due to higher volume crush. 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 for the rest of the year. Assuming weather goes normal, we expect our crushing volume in 2023 to be around 15% higher than in 2022, as we have enough sugarcane availability to utilize our industrial capacity. This, in turn, will result in a reduction in unitary cost due to better dilution of fixed costs. From a commercial point of view, sugar has registered an increase in prices throughout the year, and 2023 contracts are now trading on average about $0.25 per pound. We are in an excellent position to profit from this scenario as we have low commitments, as shown in the table below, and our 46,000 tons of sugar carried over into the second quarter to be sold at market prices. In addition, our asset flexibility allows us to achieve an annual production mix of 50% sugar above Brazil's flexibility. Furthermore, there have been positive developments for ethanol as well. On March 1, 2023, the Brazilian government announced the return of federal tax scopes on gasoline and ethanol after being zeroed since mid-2022. Finally, the National Council for Finance Policy introduced changes in the collection of ICMS for gasoline, set to take place on June 1, 2023. Consequently, the outlook for ethanol also remains constructive for the short term. Now we would like to move on to the Farming business. Please go to Slide 12. Planting activities for the 2022-2023 campaign reached a total of 268,000 hectares, making a 6% decrease compared to the previous campaign. We are currently undergoing harvesting activities for most of our grains. As of the end of April, we have a 51% of the total area and produced over 500,000 tons of agriculture produce. In this regard, we cannot help but mention that the below-average precipitation that we mentioned during our previous report continued throughout the stage of yield definition of all our crops. Although we are diversified in terms of products and geography, crop development was negatively impacted. Precipitations received in the last few weeks will enable yields to remain at current levels, reducing the downturn risk. However, we expect yields for our 2022-2023 crop campaign to be between 30% to 40% lower compared to historical levels. Looking forward, there is a strong likelihood of weather shifting to El Nino in the second semester of 2023. This will allow for an improvement in soil moisture and recovery of water levels in the reservoirs, favoring the outlook for the 2023-2024 harvest season. As Mariano mentioned, we will begin planting activities for our winter crops in July this year, which results will be reflected in the last quarter of 2022. On the following Page 13, we would like to present the financial performance of our Farming and Land Transformation businesses. Adjusted EBITDA totaled $19 million, making a 48% reduction year-over-year. As expected, our crops business had a poor performance as a consequence of the drought. However, this was offset by the improved performance of our Rice business, driven by higher selling volumes. On the other hand, the dairy business presented results in line with last year's. In our crop business, adjusted EBITDA amounted to $196,000. As previously explained, results were mainly impacted by the reduction in yields coupled with a genuine increase in costs in U.S. dollar terms and a reduction in planting area versus the previous season. Adjusted EBITDA in our Rice business was $13 million, presenting a 54% increase compared to the previous year. Higher results were explained by an increase in both volume and average prices due to a better mix of higher value-added products, among other drivers. However, results were partially offset by a year-over-year reduction in yields caused by the impact of a line in some of our right funds and higher costs in U.S. dollar terms. Moving on to the dairy business. Adjusted EBITDA totaled $6 million, in line with last year. Results were explained by higher average selling prices, and we increased the mix of higher value-added products, coupled with our continuous focus on achieving efficiencies in our vertically integrated operations. Again, results were offset by higher costs, including cost of feed of our dairy cows on account of La Nina. In the case of land transformation, although no farm sales were concluded, results reflect the mark-to-market of an account receivable corresponding to the latest sale of farms in Brazil, which tracks the evolution of soybean prices. Let's now turn to Page 15, where we would like to present our capital allocation strategy. In 2022, we generated $141 million of net cash from operations. As Mariano mentioned earlier, according to our distribution policy, we are committed to a minimum distribution of 40% of the cash generated during the previous year via a combination of cash dividends and share repurchase. In terms of dividends, our dividend distribution of $35 million was approved during our Annual Shareholder Meeting held on April 19. The first installment of $17.5 million will be paid on May 24, while the second installment shall be payable in November in an equal cash amount. In addition, during 2023, we have already repurchased $9 million in shares, which represents approximately 1% of the company's equity. Moving on to the debt position, our net debt increased 5% compared to the same period of last year, amounting to $830 million. This was mainly explained by the financing of an additional $17 million in inventories of finished goods, as well as the financing of our growth CapEx. As of March 31, 2023, our liquidity ratio reached 1.2x, showing the company's full capacity to repay short-term debt with its cash balances, whereas our net leverage ratio was 1.9x, in line with the previous year. To conclude, 26% of total CapEx invested throughout the quarter was allocated to expansion projects. Investments on this front were mostly related to continue increasing our sugar implantation, as well as other small projects, such as the acquisition of a generator and a Tubareducer in Ardelyx, which will enable us to generate more energy and the development of our biomethane production out of vinasse. In our Farming division, we are constructing our second biodigester in our dairy business, which will be using manure as an input to generate renewable energy, a project aligned with our sustainability commitment. It is worth mentioning that we are currently revising every uncommitted capital expenditure for our farming business given the impacts of the drought in our results. Thank you very much for your time. We are now open to questions.

Operator, Operator

Our first question comes from Isabella Simonato from Bank of America. Please go ahead, Isabella; the microphone is yours.

Isabella Simonato, Analyst

Hi. Good afternoon. Mariano, Emilio, thank you for the question. I actually have two questions, both regarding sugarcane. First, you mentioned in the release your intention to increase crushing this year by 15%. Given the strong start to the season, do you see any potential for an increase in crushing volumes and further cost reduction as the year progresses? My second question is related to your unhedged position for the season while sugar prices are rising. Are you able to sell sugar at these levels in the short term? Additionally, considering the potential impact of El Nino on Indian production, what is your medium-term outlook on global sugar demand, supply, and pricing? Thank you.

Mariano Bosch, CEO

Thank you, Isabella, for your question. Very good question. I will ask Renato to go through the answers to both questions that we can explain clearly.

Renato Junqueira Pereira, Sugar, Ethanol and Energy VP

Isabella, regarding the sugarcane question, the sugarcane outlook looks very good at this moment. We had a very good summer in terms of weather. A lot of good rains and hot weather, which is the ideal weather for the development of the sugarcane. So we're expecting yields higher than we had in the last two years. I think this is the main reason. We crushed 1.5 million tons in the first quarter. I think we were one of the few players crushing sugarcane during this period. So considering this scenario, sugarcane is no longer a limiting factor. So we have plenty of sugarcane to have a full year of crushing. Of course, we depend a lot on weather to estimate the crushing from now on. But we are optimistic that we will increase our crushing by about 15%. And considering the second question about the sugar, I think we are very positive regarding the sugar scenario. Actually, the supply and demand situation has improved very quickly. Back in October, most analysts were projecting a surplus of 4 million tons of sugar. Today, almost the consensus is a 3 million deficit. I think the reason for this change was some problems in key countries like India, Thailand, and the European Union. So at this moment, the market is very dependent on Brazilian sugar production. Everyone is expecting that Brazil is going to produce 38 million tons of sugar, which is challenging, but it's possible. I think we have already done it before, in 2020, if I'm not mistaken. And we think that this cycle of high prices will last longer because we are not seeing any reaction from any other country. Brazil has a limited crystallization capacity. So in order to increase sugar production out of Brazil, mills must invest in new sugar kitchens, and that takes approximately a year. Additionally, the other crops that compete with sugarcane in Brazil are also limiting factors, particularly grains. Even if we see significant competition with crops in other countries like Thailand, which is experiencing competition with crops like cassava, that’s the reason we remain optimistic about sugar, and we are not very advanced in our hedge position. As it was mentioned, we have hedged only 50% of our production, mainly the sugar that we have already produced and sold. So we haven't sold anything that is supposed to be delivered in the future, and we haven't sold anything for next drought yet.

Mariano Bosch, CEO

Thank you, Renato. Isabelle, on the first question, a quick clarification: the 15% increase is an increase compared to the previous year, not to our current estimate.

Isabella Simonato, Analyst

That is clear. Thank you.

Operator, Operator

Our next question comes from Rodrigo Almeida from Santander. Mr. Rodrigo, your microphone is open.

Rodrigo Almeida, Analyst

I have a few questions here. My first question maybe was to Mariano. It's regarding the strategic side of the company and capital allocation. Actually, I'll divide this question into two parts. So, I mean, we've always seen on the pages of farming company, right, which is indeed in the company's DNA being the lowest cost producer, and we've been very familiar with this strategy. But my question to you is, you've clearly proven yourselves on the industrial side of things. You've been doing a great job on the industrial side. You've been investing in the biodigesters here as well. So my question goes along the lines here of whether you could eventually invest more say on the downstream side of things. Maybe perhaps I'm thinking very upon here, maybe perhaps on soba pricing. I don't know anything that relates more to the downward side of things. So that's the first part of this first question. The second part of the question is on capital allocation still. But I assume it on the farming side. So perhaps if you could explain to us here, what's your point of view on perhaps expanding to other countries inside Brazil, maybe land and these costs are high, but I wanted to get your view here on whether you could be thinking of expanding into other cultures in Brazil. That would be nice to hear from you. And then I have a few other questions here on the sugar national side. I think I wanted to get your view first on the government's policy to increase the debt on blending gasoline. If you have any opinion on that, if it's fees more or how long could it take to reach the 30%. Anything on that front would be helpful for us in the industry and tube ethanol. And actually, it's a broader question, maybe that question here on the biodigestion and biomethane production. I understand you're doing that first to replace diesel consumption, right? But then we're seeing some distributors investing more in the transportation side for biomethane. So perhaps if you could explain to us what's your take on selling this biomethane to others, it would be nice to understand as well. Thank you.

Mariano Bosch, CEO

Okay. Very good questions and relevant questions, Rodrigo. Thank you for the number one regarding this capital allocation and our overall strategy. I would say that we have these four lines of businesses that we've been always talking about—they all include farming, but they all include a circular, sustainable production system that includes all this circular system. So within the four business lines that we have, all this is included. And this is very important to take into account our ESG approach to each one of these. Each one has its own strategic move. And as you've been hearing, as you can say, we can discuss largely and spend more time on the business plan of each one of these projects. On the sugar and ethanol side, as you've been hearing, we have this organic growth, but on top of this, and more relevant, we have all these different technologies that we are developing and all these increases in productivity and efficiencies that we are making every day on our day-to-day job. I think this has always been the focus. It is not just the agricultural part. It's the integrated part. So all these solutions are what is relevant when we're talking about this segment. The same thing goes for the dairy business. When we think about the dairy business, we are under the production of the feed, we are under the production of the raw milk, and then we have this processing of milk going to different products along with the reusing of all the manure of the cows into biofertilizers and into biodigesters that generate this biogas. So the biogas is not only generated through the vinasse, but also in the manure of the cows. You can see the same concept of the circular economy. The same is what you see in the rice project, in the rice project, which goes from seeds that we develop right up to the final client today. We are offering much better prices on rice, and that's not simply because the price of rice has gone up. This is mainly because we have developed specific varieties that each one of our 100-and-something clients has all over the world that are looking for the right variety that we have produced specifically for them. So all this development is ongoing in each one of these four business lines. And we've been spending a lot of focus on this and a lot of time on this concept of capital allocation. That's why since two years ago, we developed this distribution policy that includes that 40% of the cash—that is, the net cash that is being generated to distribute among shareholders through buyback and dividends. The other 60% is being applied for the growth of all these synergistic projects that make us more efficient as we continue growing. So that's basically a quick answer to the general question on capital allocation that you asked first. Then going to your second question that is these policies and government have views on the price of gasoline. I will ask Renato to go through that quickly.

Renato Junqueira Pereira, Sugar, Ethanol and Energy VP

Yes, regarding the question about the increase in the blend rate, we think that it is technically feasible to do that, considering that almost 90% of the Brazilian fleet is flex-fuel, which would create an additional demand for 1 billion liters of anhydrous ethanol, which is about 10% of the anhydrous production, which would be very, very good. But we think that the discussions are still at an early stage. So we haven't— we don't know when it's going to be implemented. We are following the discussions in the news through Unica and the media. Regarding the biogas question you asked, today, we have stabilized our production of biogas and we have started to produce biomethane, and we are starting to replace the diesel in our fleet—but we also have a lot of demand to sell the biomethane molecule at our mill. So what we are doing now is performing arbitrage between the two possibilities to choose what the best way to proceed is. We started with this replacement, but we are also analyzing the possibility of selling to third parties.

Rodrigo Almeida, Analyst

That's great. Thank you so much, guys. Have a good afternoon.

Renato Junqueira Pereira, Sugar, Ethanol and Energy VP

Thank you, Rodrigo.

Operator, Operator

Our next question comes from Lucas Ferreira from JPMorgan. Please go ahead, Lucas, your microphone is open.

Lucas Ferreira, Analyst

Hi guys. Good afternoon. Two questions from me. One is a question on your production costs for both main businesses, say, farming and sugar and ethanol. In the sugar and ethanol, what do you expect your, let's say, cash COGS per TRS to evolve this season, considering your very high expectation of increasing crushing? I believe some other lines like diesel also declining and maybe some others. And in the case of farming, especially in crops, how do you see your fertilizer view next season; it's going to give you some opportunity there to lower costs? And the second question is just maybe a follow-up on the hedge. What prevents you go even deeper there in the hedge curve now. So if it's something you're considering or just because of your policy, you're still waiting for the crop to come. So what prevents you from going above that 50% in hedge for also this season, given the strong prices and I would imagine very strong margins that you get with this $0.26 per pound spot price. Thank you.

Mariano Bosch, CEO

Thank you for your question, Lucas. Regarding the production costs in the farming business, what you're currently observing are the increased production costs from the '22-‘23 campaign. This campaign experienced higher fertilizer prices, and likely an increase in herbicide prices as well. For the upcoming season, which starts in July of this year, fertilizer prices have decreased by 20% to 30% for nitrogen fertilizers, with smaller reductions for phosphate fertilizers and herbicides. This will impact the cost of production. Additionally, the fixed cost per hectare is influenced by yield. The very poor yields from this year across various crops are also affecting costs, but with the El Nino forecast for next year, we do not anticipate that continuing. Therefore, for the next season, we expect a decrease in overall farming costs. Renato will provide more detail regarding the costs of sugar and ethanol.

Renato Junqueira Pereira, Sugar, Ethanol and Energy VP

In the sugar ethanol business, there are some cost components that are decreasing such as fertilizer and diesel. Others are increasing. I think the major one is freight, which has increased because of the freight situation and the competition for grains in Brazil. But I think the most important factor is that yield and volumes are increasing. So it's going to have a higher dilution of our total cost. We expect our cost to decrease between 5% and 10% compared to the cost that we had last year. And moving to your other question about the hedge. As I mentioned before, we are very optimistic about the fundamentals of the business, I would say, in the short term and short to midterm. So we think that the future price must be in line with the current price—so the curve that today is inverted should be more flat, and we think that is going to happen sometime in the future. And then we will have more opportunity to fix our price at a higher level.

Lucas Ferreira, Analyst

Super clear. Thank you very much.

Renato Junqueira Pereira, Sugar, Ethanol and Energy VP

Thank you, Lucas.

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. Please, Mr. Bosch, you may proceed.

Mariano Bosch, CEO

Thank you all for joining the call, and I hope to see you in our upcoming meetings.

Operator, Operator

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