Adecoagro S.A. (NYSE:AGRO) Q3 2023 Earnings Call Transcript
Adecoagro S.A. (NYSE:AGRO) Q3 2023 Earnings Call Transcript November 14, 2023
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 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 during the company's presentation. After the company's remarks are completed, there will be a question-and-answer session. 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: Good morning and thank you for joining Adecoagro's 2023 third quarter results conference. As you may have seen in the report, we are presenting very good operational and financial results. Our adjusted EBITDA during the quarter was $155 million, 27% higher compared to last year. We are very enthusiastic about how our sugar ethanol and energy business continues to perform. Last quarter, I mentioned some of the work we started doing a few years ago to enhance the productivity of our sugar cane plantation. I mentioned innovative techniques like pre-sprouted seedlings and its reproduction in our own bio-factory, the incorporation of state-of-the-art farming equipment, the use of drones and artificial intelligence, biological pesticides, et cetera, et cetera.
During this quarter, we saw the results of our work. For example, we achieved record crushing volume of 4.5 million tons. The quantity and quality of our sugar plantation is in an excellent shape with TRS content per hectare over 30% higher year-over-year. With this sugarcane, we produced a record volume of sugar. Indeed, we focus on solving minor bottlenecks in our sugar kitchen and were able to produce sugar above our nominal capacity, increasing our already large flexibility. And this came at a time when sugar commanded a premium over hydrous ethanol of more than 50%. We remain with our hedges open and very well-positioned to continue taking advantage of these price opportunities. Brazil is the most efficient country in the world in the production of sugar and we own one of the most efficient operations in Brazil and therefore, in the world.
The region of Mato Grosso do Suland, where our cluster is located, allows us to mill all the year round, maximizing our milling time, while at the same time, diluting our costs. We are very proud of our operational teams for the constant search of efficiencies and opportunities to expand our production. Now, let's move into our Farming business in Argentina and Uruguay. As you already know, this year, we experienced the worst drought in history. This had an impact in our results. But during the year, we focused on strengthening efficiencies across all of our operations, finding saving opportunities to mitigate the impact. In the crop business, our results were significantly affected by the drought, as we mentioned in the past releases, but this is now behind us.
We are starting fresh with the 2023-1024 campaign. All of our teams are fully focused on planting activities, which are being conducted under excellent conditions. El Nino weather event that we have been talking about for the past months is now here and has improved soil humidity across all of our productive regions. We are in an excellent situation to maximize yields in all our crops and go back to normalized EBITDA levels for this segment. In the case of our Rice business, we are achieving even better results than last year. A big part of this was thanks to the decision we made last year to set a foot in Uruguay by acquiring rice mills. This offers greater sustainability to our operations and provided us with more commercial tools. We are entering into new markets, offering clients customized varieties of high-quality rice developed in our own seed unit and full product rice.
This better mix of higher value-added products is allowing us to book premium on top of the high lower price prices. In terms of the 2023-2024 campaign, water reservoirs recover stands to the rains received. So, we have the necessary water levels to secure a successful campaign. So far, we have already planted 80% of our plan. In our Dairy business, we are achieving results in line with last year. The impact of the drought was mainly seen in higher costs of feed. However, we were able to mitigate this with a record high productivity levels in our fully populated feed stores. Also having the flexibility to sell into the domestic and export market and switch production from one to the other was key during this month of lower powder milk prices.
Regarding our land portfolio, during the quarter, we sold the farm in Argentina for more than 20% above our independent appraisal and with a very attractive IRR. A quick note on ESG, as we always said, since inception, we have been focused on developing sustainable production models in the interiors of the countries where we operate. Part of the work we have been doing with our ESC committee is to better communicate how we create value from an economical, environment, and social point of view under a robust corporate governance model. We are proud to see that our work is paying off and ESG rating agencies like Sustainalytics rank us among the leading players in our industry. In the meantime, we continue making progress in our operations. For example, in our production of biomethane, which we are already using to power more than 130 vehicles, replacing diesel consumption.
Finally, in terms of distribution, we are complying with our policy, always maintaining our debt levels below two times EBITDA. Next week, on November 24th, we will be paying the second installment of our cash dividend. This represents an annual dividend of $35 million or $0.33 per share on top of the $24 million, we have already invested in share repurchases this year. To conclude, I want to thank our team, it is because of your hard work and effort that despite a very challenging start of the year, we are managing to end it with a very positive outlook ahead. Thank you to our shareholders for your continued support. Now, I will let Emilio walk you through the numbers of the quarter.
Operator: Also, I don't make any noise, but if you need anything, I'm here. Okay.
Emilio Gnecco: [Technical Difficulty] $88 million during the third quarter, making a 2% year-over-year increase, while on an accumulated basis, it reached $1 billion, 7% higher than the previous year. This was mostly explained by greater productivity indicators in our Sugar, Ethanol, and Energy division, which enabled us to increase our sugar production and execute sales at solid prices, coupled with higher average selling prices in our Rice and Dairy businesses. In addition, during September, we completed the sale of El Meridiano farm for a selling price of $48 million fully collected at the closing date. Consequently, adjusted EBITDA reached $155 million during the quarter, whereas year-to-date, it stood at $381 million, 27% and 16% higher than its respective previous periods.
Now, please turn to Slide 5 and direct your attention to our production figures. As you can see on the bottom right chart, crushing volumes in our Sugar, Ethanol, and Energy business were up 31% on a year-to-date basis. Higher crushing translates into higher production volume, which drives sales at the same time as it dilutes costs. This was mostly possible, thanks to the implementation of innovative agricultural techniques such as pre-sprouted seedling, which enable us to reproduce sugarcane varieties that have better performance, both in yields and TRS content in our regions. On the other hand, total production in our farming division reported a 29% year-over-year reduction, mostly explained by the reduction in yields and planted area in our crop segment because of El Nino weather event.
Let's move ahead to Slide 7 with the operational performance of Sugar, Ethanol, and Energy business. During the third quarter, we marked a new record in crushing volume of 4.5 million tons, 20% higher versus the prior year. This was mostly driven by solid productivity indicators such as yields, which presented a 27% year-over-year improvement to 82 tons per hectare during the quarter, while TRS content increased 3% to 145 kilograms per ton. In terms of mix, we diverted as much as 49% of our TRS to sugar, in line with our strategy to maximize production of the product with the highest marginal contribution. In fact, throughout the quarter, we were able to produce more sugar than our nominal industrial capacity, thanks to small adjustments made in our sugar kitchen to reduce bottlenecks and benefit from the high TRS per hectare and profit from this price scenario.
Consequently, sugar production reached 320,000 tons during the quarter, making a new record for our mills. Within our ethanol production, 96% was hydrous, which can be dehydrated at a time and turned into anhydrous ethanol and be sold either to the domestic or export market, wherever the price premium is great. On a year-to-date basis, crushing volume reached 9.6 million tons, 31% higher year-over-year. As mentioned before, this is mostly explained by a significant improvement in yields and TRS content as well as to greater sugarcane availability, which enabled us to resume our continuous harvest model during the first quarter of 2023. Production mix stood at 48% sugar and 52% ethanol on a year-to-date basis. As shown in the bottom right chart, while we maximize sugar production throughout the first nine months of the year, the profit from the rally in global sugar prices, last year we maximized ethanol during the first semester and switched to sugar during the third quarter as ethanol prices decreased.
This proves the high degree of flexibility of our mills. Let's please turn to Slide 8, where we would like to describe our sales conducted throughout the year. Net sales amounted to $190 million during the quarter and $471 million year-to-date, making a 17% and 16% increase compared to the previous year, respectively. In both cases, this was driven by higher sugar sales on higher production and prices, which fully offset the year-over-year reduction in ethanol sales. As you can see on the top left chart, selling volumes of sugar amounted to 546,000 tons year-to-date as our mix decision favored sugar production to capture the significant price premium over ethanol. Consequently, our average selling prices increased 20% versus the prior year.
In the case of ethanol, we made the commercial decision to reduce sales and build stocks as prices have decreased due to high supply levels in Brazil. In addition, it must be recognized that the year-over-year comparison is not fair, as in April 2022, we took advantage of a market opportunity that ethanol offer and sold our production at very attractive prices. It is worth highlighting that within the volumes sold year-to-date, we exported 29,000 cubic meters at an average price of $0.196 per pound of sugar equivalent. This is so since we have the necessary certifications and industry capacity to meet product specifications. On an accumulated basis, energy selling volumes increased 14% compared to the prior year, but the average selling price decreased by 9% due to lower energy spot prices.
Regarding carbon credits, we sold $2 million worth of Cbios during the quarter, making a 33% year-over-year increase on higher average selling prices, which fully offset the lower volume of Cbios issued on lower ethanol sales. Year-to-date, we sold over 320,000 Cbios amounting to $6 million in 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 $115 million and $308 million during the third quarter and on an accommodated basis, respectively. In both cases, the increase was mainly driven by higher net sales. However, results were partially offset by a year-over-year loss reported in the mark-to-market of our commodity hedge position on higher global sugar 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 weather going normal, we maintain our expectation to increase 2023 crushing volume by 15% compared to 2022 as we have sufficient sugarcane availability to utilizing our industrial capacity. This, in turn, will result in a reduction in unitary cash cost due to better dilution of fixed costs. From a commercial point of view, sugar prices continue to be supported by strong fundamentals and the closest contract is trading on average about $0.27 per pound. We are in an excellent position to profit from this scenario as we have 11% of our expected 2023 sugar production unhedged and for the 2024, 82% of our sugar position remains open.
In the case of ethanol, [Indiscernible] at the pump currently stands at 62%, pressured by greater cane productivity in the south region and limited storage capacity. Consequently, we expect prices to recover towards the end of the harvest season when the offer pressure is over and the demand is greater. For that reason, we are currently taking advantage of our ethanol tank storage capacity to carry over production into the following quarters. In the meantime, we are profiting from opportunities in the export market. Post the end of the third quarter, we sold 25,000 cubic meters of anhydrous ethanol to Europe. Now, we would like to move on to the Farming business. Please go to Slide 12. As of the end of October 2023, we concluded harvesting activities related to our 2022-2023 harvest season and produced over 800,000 tons of agricultural produce.
As previously stated, yields for most of our summer crops presented a significant decline compared to the prior campaign because of La Nina weather event. On the other hand, planting activities for 2023-2024 campaign are currently underway, and we expect a positive outlook as weather has shifted to El Nino. Recent rains registered in almost all the productive regions of Argentina and Uruguay has allowed for an improvement in soil moisture and recovery of water reserves, favoring planting activities for our summer crops. Consequently, we see a potential upside in planting area for rice as well as full recovery in adjusted EBITDA generation in our crop business in 2024. There is no long-term impact in our earnings potential from the past dry weather.
On the following Page 13, we would like to present the financial performance of our Farming and Land Transformation businesses. Adjusted EBITDA totaled $47 million in the quarter, making a $30 million year-over-year increase. Year-to-date, adjusted EBITDA was $90 million 23% higher than the previous year. In both cases, this was explained by an outperformance from our Rice division coupled with the sale of El Meridiano farm which in turn fully offset the weak performance of crops and from the dairy business. Starting with our crop business, adjusted EBITDA amounted to $98,000 and $607,000 during the third quarter and first nine months of the year, respectively. As previously explained, results were mainly impacted by the reduction in yields coupled with a genuine increase in costs in dollar terms and a reduction in planted area versus the previous season.
Adjusted EBITDA in our rice business was $11 million in the third quarter and $38 million on an accumulated basis. This was driven by an increase in the average selling price due to a better mix of higher added value products and higher global prices, which, in turn, fully offset the reduction in yields and the increase in costs in dollar terms. It is worth highlighting that India, the world's largest rice exporter and the export of long-range white rice to secure domestic supply. Consequently, we expect to continue capturing these higher prices in the short to mid-term as demand shifts to South American rise due to limited supply from Asian countries. Moving on to the dairy business. Adjusted EBITDA totaled $6 million, 33% lower than the prior year, while year-to-date, it stood at $23 million, making a 4% year-over-year reduction.
Results were explained by higher average selling prices as we produce more fluid milk for the domestic market, which offered the highest marginal contribution during this period, coupled with our continuous focus on achieving efficiencies in our vertically integrated operations. However, these results were partially offset by higher costs in dollar terms, especially cow feed. During September 2023, we completed the sale of El Meridiano farm located in the Province of Buenos Aires, Argentina, for a selling price of $48 million, which was fully collected at the closing date. I would like to point out that the farm was sold at a 29% premium to the 2022 Cushman & Wakefield's independent farmland appraisal. Let's now turn to Page 15, where we would like to present our capital allocation strategy.
As a way of reminder, during 2022, we generated $141 million of net cash from operations. 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, on November 24, we will make our second cash dividend payment of $17.5 million, which represents approximately $0.16 per share. The first installment was paid on May 24 in an equal cash amount, resulting in an annual cash dividend of $35 million. In addition, we have already repurchased $24 million in shares year-to-date, which represents approximately 2.4% of the company's equity. Moving on to our debt position. Our net debt amounted to $707 million, making a 13% decrease compared to the same period of last year and a 17% quarter-over-quarter reduction.
This was explained by our net cash from operations generated during the last 12 months and the company's financial strategy, which in turn enabled us to reduce our net debt position while also attending our distribution policy and growth projects. As of September 30, 2023, our liquidity ratio reached 1.8 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, 0.6 times down compared to the previous year. To conclude, 28% of total CapEx invested throughout the quarter was destined to expansion projects. Investments on this front were mostly related to continue increasing our sugarcane implantation and the construction of our second bio-digestion in Brazil. Once we included the latter will enable us to increase our current biogas production, which is then converted into biomethane and used to replace our diesel consumption.
As of today, we have over 120 lightweight vehicles adopted and running with biomethane as well as other eight heavyweight vehicles. In our Farming division, we have renewed our cheese production line in Morteros facility. Investments made will contribute to accessing new markets and clients through the production of other types of semi hard and hard cheeses, while simultaneously decreasing the amount of waste generated throughout the entire production process. Thank you very much for your time. We are now open to questions.
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