Earnings Call Transcript - AGRO Q1 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 First 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. Vitoria 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 this time, further instructions will be given. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Adecoagro's management and on information currently available to the company. They involve risks, uncertainties, and assumptions, because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Adecoagro and could cause results to differ materially from those expressed in such forward-looking statements. Now, I'll turn the conference over to Mr. Mariano Bosch, CEO. Mr. Bosch, you may begin your conference.

Mariano Bosch, CEO

Good morning, and thank you for joining the Adecoagro’s 2024 first quarter results conference. Consolidated adjusted EBITDA during the quarter reached $90 million, in line with our previous year. Our sugar, ethanol, and energy business reported a record figure for the first quarter ever since we set foot in Brazil. This was possible thanks to all the investments in expansion planting to have good cane availability. In fact, we were one of the only players harvesting and producing sugar, and we continued to command an attractive premium over ethanol during the quarter. Having in place a continuous harvest model enabled us to crush cane year-round and to constantly supply new products to the market, especially during Brazil's inter-harvest period. Moreover, the higher the milling, the lower our cost of production. Despite this outstanding operational performance, the decrease in the forward curve of sugar prices was the main driver of the year-over-year decline in adjusted EBITDA for this particular segment. Moving to our farming operations, the outperformance in all three operating segments reflects the daily effort and hard work of our teams towards maximizing yields and maintaining our position as a low-cost producer. In crops, normal weather conditions translated into a significant recovery in yields, consequently improving results despite the lower international prices for soy, corn, and wheat. We are currently in the middle of the harvest season, therefore yields are still being defined, but we know that we are on track for a normal operating year for this segment. Furthermore, our sustainable integrated business model in our rice operation allowed us to capture a significant year-over-year increase in the average selling price, as we were the only rice producers with available production when stocks were limited. This flexibility allows us to cater to both the domestic and export markets with our high-value-added products. In the dairy segment, the significant recovery in crop yields helped reduce the cost of feed for our dairy cows, which is one of the main cost components of this business. We continue working on product development for both domestic and export markets, leveraging our flexibility to supply both markets with our diverse portfolio. Before passing the word to Emilio, I want to provide a brief update on our distribution policy. On April 17, our Annual Shareholder Meeting approved a total cash dividend distribution of $35 million. Additionally, we continue buying back shares under our program, having already repurchased 2.6 million shares, equal to 2.4% of the company's equity. As you can see, we are committed to our distribution policy while also investing in growth projects with attractive internal rates of return and maintaining our debt levels. To conclude, I would like to express my gratitude to all our employees, contractors, and stakeholders for their hard work and commitment. 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 four with a summary of our consolidated financial results. Gross sales totaled $254 million during the first quarter, 3% higher year-over-year. This was mostly attributed to a greater sugarcane crush, which enabled us to increase our sugar production and execute sales at solid prices. Additionally, our rice operations reported an 83% year-over-year increase in the average selling price, driven by limited supply in both the export and domestic markets. Adjusted EBITDA reached $90 million, in line with the previous year. The outperformance of all three of our farming businesses fully offset the decline reported in the sugar, ethanol, and energy business, which was explained by losses in our biological assets driven by the reduction of sugar and ethanol prices. Now please turn to slide five. Regarding our production figures, in the bottom right chart, we can see that crushing volumes in our sugar, ethanol, and energy business were up 47% versus the same period last year. Higher crushing translates into greater production volume, ensuring increased sales and cost dilution. Total production in our farming division reported a 19% year-over-year increase, which can be attributed to a full recovery in yields thanks to the normal weather conditions observed during the development of our crops, in addition to a larger planted area. Let's move to slide seven to review the operational performance of our sugar, ethanol, and energy business. During the first quarter of 2024, crushing volume amounted to 2.2 million tons, an all-time record for our first quarter. This was primarily due to greater sugarcane availability, a result of the expansion planting activities carried out over the past years. In terms of productivity, TRS per hectare remained consistent compared to last year as TRS content presented a 5% year-over-year improvement, reaching 117 kilograms per ton, while yields reached 70 tons per hectare. In terms of mix, we diverted 49% of our TRS to sugar, in line with our strategy to maximize production of the highest marginal contribution product, taking advantage of the high degree of flexibility of our mills. Within our ethanol production, 91% was hydrous, compared to 29% last year, as demand for this type of ethanol has been significantly increasing. Let's please turn to slide eight, which describes sales conducted throughout the period. Net sales amounted to $103 million during the quarter, representing a 7% increase compared to the same period last year. This was driven by higher sugar sales at increased prices and volumes, which fully offset the overall reduction in ethanol sales due to declining selling prices. As detailed on the top left chart, our average selling price of sugar reached $23.8 per pound, thanks to our hedging strategy, which allowed us to capture the rally in global sugar prices. Moreover, selling volumes amounted to 120,000 tons due to increased production resulting from higher milling. In the case of ethanol, selling volumes were up 11% versus the prior year due to higher demand for hydrous ethanol, even as the average selling price fell 30% year-over-year. Lower prices were explained by higher inventory levels carried into the inter-harvest period, resulting in more supply of ethanol in the market. The average selling price of energy increased by 2% compared to the previous year, though selling volumes were down 13% as we prioritized volume contracts and saved our bagasse for more profitable alternatives. Regarding carbon credits, we sold over 80,000 CBios at an average price of $19 per CBio. Please go to page nine, where we would like to present the financial performance of the sugar, ethanol, and energy business. Adjusted EBITDA amounted to $52 million in the first quarter, a 32% decline from the same period last year. Despite the year-over-year increase in milling and sales, results were negatively affected by losses in the market-to-market of our biological assets, as lower outlooks for sugar prices were compounded by higher freight costs and increased sugar sales. Finally, to conclude with the sugar-ethanol energy business, please turn to slide 10, where we briefly talk about the current outlook. Rainfalls received in the last few weeks have continued to benefit the productivity of our plantations. Assuming normal weather persists, we expect to increase our crushing volume compared to 2023, as we have sufficient sugarcane availability to utilize our industrial capacity. This will, in turn, reduce unit cash costs through better dilution of fixed costs. From a commercial standpoint, the evolution of sugar prices will largely depend on Brazilian production and logistics. We have approximately 40% of our expected 2024 sugar production still ahead, while the balance was committed at an average price close to $0.24 per pound. In the case of ethanol, prices recovered by 30% in early April compared to the lowest levels reported earlier this year. Consequently, we sold over 80,000 cubic meters of ethanol at an average price of $566 per cubic meter, taking advantage of the peak prices to partially clear our tanks. We believe ethanol prices have room for further increases due to the current low parity at the pump. Now, we would like to move on to the farming business. Please go to slide 12. We are currently in the midst of harvesting for most of our grains. As of the end of April, we harvested 47% of the total area and produced over 600,000 tons of agricultural products. Normal weather conditions experienced throughout the yield definition stage favored crop development, resulting in a full recovery in yields. However, late corn in the Northern region of Argentina has been adversely affected by spiroplasma, a bacterium conducted by a leafhopper. This bacterium reproduces in tropical conditions, as seen in Brazil and Paraguay, but has recently spread to Northern Argentina amidst the high humidity and temperatures observed. Hence, approximately 15% of our total corn production was affected, aligning with the decline in Argentina's overall corn production. Nonetheless, we are still on track for historical average yields due to our geographic diversification, which enables us to mitigate weather risks and diseases that may impact a particular crop in any given year. Lastly, we have already harvested 88% of our rice, achieving an average yield of 6.5 tons per hectare. Though it was a challenging campaign due to adverse weather conditions at various growth stages of our rice, we managed to improve yields. On page 13, we present the financial performance of our farming business. Adjusted EBITDA for the farming business totaled $44 million in the quarter, representing a $25 million year-over-year increase. Higher results stem from outperformance in all three segments. Before delving into the results of each operating segment, let me remind you that we have adapted our internal reporting to refine the way we view our farming business and its interaction with land transformation activities. Consequently, we have recast previously reported segment financial information. Adjusted EBITDA for our crops segment amounted to $5 million in the first quarter, reflecting a $6 million increase year-over-year. This was fully driven by recovery in yields, resulting in a $15 million year-over-year gain in the mark-to-market of our biological assets. Following the end of the quarter, we completed the sale of the La Pecuaria farm located in the province of Durazno, Uruguay, for a selling price of $21 million, collected in full at closing. This transaction generated an adjusted EBITDA of $15 million, which will be recorded in our crop segment in the second quarter. Adjusted EBITDA for our rice segment was $33 million, $19 million more than the same period last year. This was mainly attributable to a $13 million year-over-year gain in the mark-to-market of our biological assets, due to a better campaign in terms of area, productivity, and prices. Additionally, we captured an average selling price of $433 per ton, higher than the prior year, as we were the only rice producer with available stocks when supply was limited. Moving on to the dairy segment, adjusted EBITDA totaled $6 million, 5% higher than last year. Results were positively impacted by a year-over-year decline in our cost structure, particularly concerning feed costs, as our in-house production recovered from lower crop yields reported last year due to dry weather. Let's now turn to page 15, where we present our capital allocation strategy. In accordance with our distribution policy, we commit to a minimum distribution of 40% of the cash generated in the previous year through a combination of cash dividends and share repurchase. In 2023, we generated $176 million of net cash from operations. Consequently, our minimum distribution amounts to $70 million for the current year. In terms of dividends, a distribution of $35 million was approved during our annual shareholder meeting held on April 17. The first installment of $17.5 million will be paid on May 29 and represents approximately $0.17 per share, while the second installment will be payable in November in an equal cash amount. Additionally, we have already repurchased $27 million in shares under our buyback program, amounting to approximately 2.4% of the company's equity. Please turn to page 16 for a broader overview of our debt position. Net debt amounted to $639 million, reflecting a 23% decrease compared to the same period last year. This was achieved through a significant reduction in gross debt as a result of our financial strategy implemented during 2023 and the first quarter of 2024, alongside improved operational performance. As illustrated by our financial figures, the reduction in net debt was accomplished without neglecting our distribution policy and growth projects. As of March 31, 2024, our liquidity ratio reached 2.9 times, indicating the company's full capacity to repay short-term debt with its cash balances, while our net leverage ratio stood at 1.3 times, 0.6 times lower than the previous year. On the following slide, we elaborate on our capital expenditure program. Expansion CapEx represented $29 million in the first quarter of 2024. In Brazil, we continue to expand our sugarcane plantation and invest in our biogas unit at the Ivinhema mill, where our biomethane production occurs. In our farming business, we paid the third and final installment for the acquisition of Viterra’s rice mills in Argentina and Uruguay to enhance our geographic footprint in the rice portfolio. Thank you very much for your time. We're now open to questions.

Operator, Operator

Thank you. The floor is now open for questions. Our first question comes from Henrique Brustolin with BTG.

Henrique Brustolin, Analyst

Hi, hello everybody. Thanks for taking my questions. I have two, I think both of them for Renato in the sugar and ethanol business. The first, I would just like to hear a little bit more about your view on what's happening with sugar prices, right? We saw this sharp contraction in recent weeks. So how do you think the remainder of the year will unfold concerning sugar? The second question, also in sugar and ethanol, is how that changes the company's perspective on results for the year. We see that the hedging position was already advanced. Ethanol prices appear stronger at the margin, but the sugar curve is now lower. Additionally, what is your view on results for the whole crop season, even compared to the previous one? I think that would be very helpful. Thank you.

Mariano Bosch, CEO

Hi Enrique, this is Mariano, thank you for your questions. In response to your second question about the impact on the results, it's important to understand that while we have already fixed 57% of the price at a much higher level than today's prices, there is an impact on the biological assets, which is why the EBITDA is reduced as we have explained in the numbers. For the full year, this concept will apply in terms of the biological asset impact. We can expect the overall sugar and ethanol business to be lower than the previous year, though there is an expected increase in production and efficiencies, etc. Additionally, we can also see increased performance in the other crops that will probably compensate for the reduction in the sugar and ethanol sector. So, making this quick clarification on what we expect, I would like Renato to delve deeper into our outlook on sugar prices and what might unfold.

Renato Junqueira Pereira, VP, Sugar, Ethanol and Energy

Hi Henrique. It's important to take a moment to discuss the price of sugar and ethanol, as both factors are crucial to understanding our pricing. Starting with sugar, we foresee Brazil producing between 42 million and 43 million tons of sugar. Market projections have shifted from a slight deficit to a small surplus, but worldwide stocks remain very low; in fact, the stock-to-use ratio is at its lowest since 2011. Supply is highly reliant on Brazil’s crop. Any news regarding reductions in the Brazilian crop or any weather issues could trigger an increase in sugar prices. As Mariano mentioned, we are 57% hedged at approximately 23.6 cents per pound. We are optimistic about the short-term scenario for ethanol. It is likely that we will change the mix in Mato Grosso do Sul at some point in the second half of the year. We remain positive about ethanol prices since we expect a decrease in supply this year due to lower sugarcane crushing in Brazil, which is expected to be between 5% and 10% lower than last year's high crushing season. We anticipate that the mix will adjust to favor sugar slightly more than last year, which should help stabilize the market. Demand for ethanol has significantly increased, and we're seeing monthly hydrous demand approaching 2 billion liters.

Henrique Brustolin, Analyst

That's very clear. Thanks very much.

Mariano Bosch, CEO

Thank you, Henrique.

Operator, Operator

Next question from Isabella Simonato with Bank of America.

Isabella Simonato, Analyst

Hi, Mariano, Emilio. Good morning, thank you for the opportunity. I have two questions. First, on the rice business, we have been seeing a significant increase in prices, and even the prices you delivered in Q1 attracted a lot of attention. I would like to hear from you how you view the rice pricing dynamics, especially considering the potential impact in Southern Brazil. If you could elaborate on the outlook for the rest of the year, I think it would be quite helpful. The second question is related to capital allocation. As you mentioned, you are concluding some CapEx in sugar and ethanol, as well as in the rice business. I was wondering what we could expect next in terms of CapEx and potential investments, if any? Thank you.

Mariano Bosch, CEO

Sure. Thank you, Isabella. Regarding rice prices, it’s crucial to understand the overall international rice prices and our particular increase in this quarter. We've established a model that allows us to develop genetics for production at the farms, process it at the mills, and then sell it to meet our specific clients' needs. This development allowed us to command higher prices due to increased quality as well as the ability to sell in both the domestic and export markets, which provided a buffer during periods of regional supply shortages. Moving forward, we expect to maintain our strategy while acknowledging that overall supply across the region is lower than the historical average, with production challenges yielding lower than average outputs. Particularly in Rio Grande do Sul, a region critical to rice supply, resulting adverse conditions are a factor we will monitor closely. As for capital allocation, as Emilio highlighted in his presentation, we remain committed to our distribution policy while consistently evaluating investment opportunities. Given current circumstances, we see continued potential for share buybacks and will take opportunities as they arise without compromising our overall strategy. Additionally, we have observed significant opportunities within our sugar, ethanol, and energy business where competitive advantages remain strong, and recent investments have positioned us well for growth moving forward.

Isabella Simonato, Analyst

That was clear. Thank you.

Operator, Operator

Our next question comes from Larissa Perez with Itau BBA.

Larissa Perez, Analyst

Good morning Mariano, Emilio, Renato, Victoria. Thank you for taking my questions. I have two follow-ups. The first would be for Renato and it's a follow-up on Henrique’s question. You mentioned the company expects to increase sugarcane crushing this year. Could you provide some insight into the expected size of this increase and the potential drop in unit costs due to this? My second question is for Mariano. You mentioned the distribution policy allowing for a minimum distribution of 40% of adjusted free cash flow from operations. Under what circumstances might the company consider increasing distributions even further? Thank you.

Mariano Bosch, CEO

Thank you, Larissa, for your question. I will ask Renato to elaborate more on the crushing and then I will address your second question.

Renato Junqueira Pereira, VP, Sugar, Ethanol and Energy

Hi Larissa, thank you for your question. As mentioned, we have been investing in our sugarcane fields, expanding them. That investment is the reason we are experiencing record crushing in the first quarter. Initially, we anticipated higher yields this year compared to last year; however, given the current drier weather, we expect yields to be consistent with last year’s levels. Nevertheless, due to the increase in area, we project crushing to be around 5% higher than last year. As a result, we expect to see a decrease in costs between 5% and 10% due to volume dilution.

Mariano Bosch, CEO

Thank you, Renato. Larissa, to be more specific regarding your question on capital allocation, the possibility of increasing distribution can indeed occur if we maintain the current trajectory of our performance. We would exceed our distribution policy through buybacks if all proceeds remain as they have been. This is a simple answer, but forecasting for the year remains uncertain because factors such as weather and prices could impact our results. We closely monitor our projects to ensure we can manage both distribution and growth appropriately while also considering the decreasing debt levels you see today.

Larissa Perez, Analyst

That's super clear. Thank you, Renato. Thank you Mariano.

Operator, Operator

Our next question comes from Julia Rizzo with Morgan Stanley.

Julia Rizzo, Analyst

Hi, hello everyone. Thank you for taking my question. Renato, I would love your insight. Given the current decrease in sugar prices and the narrowing discount from ethanol to sugar, at what point do you decide to switch from maximizing sugar production to increasing ethanol production? Does that also affect your outlook for expected higher ethanol prices in the second half of the year?

Renato Junqueira Pereira, VP, Sugar, Ethanol and Energy

Hi, Julia. Thank you for your question. As noted, we remain optimistic about ethanol's short-term perspectives. Demand is very high, and currently in Mato Grosso do Sul, our hydrous ethanol equivalent is at $0.17 per pound, which is still below sugar prices. However, we anticipate that the scenario for ethanol prices will continue to improve, reaching upwards of $0.18 or $0.19 per pound in the near future. At that point, we will alter our production mix accordingly, switching to maximize ethanol production. It's important to remember that the 57% we have hedged for sugar assumes a max sugar scenario, so any changes will increase that hedged percentage.

Julia Rizzo, Analyst

Thank you very much; I appreciate that.

Operator, Operator

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

Mariano Bosch, CEO

Thank you everyone for participating in our call, and I hope to see you in our upcoming meetings.

Operator, Operator

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