LUXEMBOURG, Nov. 15, 2018 /PRNewswire/ -- Adecoagro S.A. (NYSE: AGRO, Bloomberg: AGRO US, Reuters: AGRO.K), a leading agricultural company in South America, announced today its results for the third quarter of 2018.
Main highlights for the period:
- Adecoagro reported Adjuested EBITDA of $79.6 million in 3Q18, marking a 5.8% increase compared to 3Q17.
- Net Income was $3.5 million in 3Q18, $5.1 million higher compared to 3Q17.
- Adjusted Net Income was $14.1 million in 3Q18, $3.5 million higher compared to 2Q17.
Financial & Operational Highlights
Adjusted EBITDA for our Sugar, Ethanol & Energy business reached $64.0 million in 3Q18, $10.4 million million or 13.9% lower than 3Q17. Adjusted EBITDA was positively affected by: (i) a 14.0% reduction in total production costs, on a per unit basis, as a result of enhanced agricultural and industrial efficiencies, coupled with the depreciation of the Brazilian Real, (ii) a $14.2 million higher gain derived from the mark-to-market of our commodity hedge position; and (iii) our ethanol maximization strategy (66.9% of total TRS produced), enabling us to profit from higher relative prices. Indeed, anhydrous and hydrous ethanol traded at 14.1 cts/lb and 13.1 cts/lb sugar equivalent during the quarter, 30.1% and 20.6% premiums to sugar respectively. These positive effects were offset by (i) lower sales, driven by the combination of lower sugar and energy selling volumes, coupled with lower sugar and ethanol prices, measured in U.S. dollar (prices measured in local currency increased by 2.4% year-over-year); coupled with (ii) a $16.2 million loss from the fair value of the unharvested cane, mainly explained by lower sugar prices.
Year-to-date, Adjusted EBITDA totaled $192.9 million million, marking a 16.2% increase compared to the same period of last year. The main drivers for the increase were (i) a 13.0% reduction in total production costs mainly explained by higher crushing volumes which allowed us to dilute fixed costs, coupled with the 13.1% depreciation of the Brazilian Real; (ii) $19.0 million higher gain derived from the mark-to-market of our commodity hedge position.
- Adjusted EBITDA in our Farming and Land Transformation businesses was $20.4 million in 3Q18, $13.5 million higher year-over-year. This increase is mainly attributable to the performance of both our Crops and Rice businesses. Enhanced operational efficiencies and the depreciation of the Argentine Peso, which allowed us to further reduce total cost of production, were responsible for the $10.1 and $5.0 million increase in our Crops and Rice businesses´ EBITDA, respectively.
On a year-to-date basis, Total Adjusted EBITDA grew by 167.2%, reaching $100.4 million. Once again, the performance of our Crops and Rice businesses were responsible for the increase. Higher margin recognition as a result of higher commodity prices in the local market coupled with a reduction in production costs, explain the $13.9 million increase in our Crops business. As for our Rice business, we registered a $14.3 million increase, as a result of a 17% increase in agricultural yields, coupled with lower production costs, measured in U.S dollar. In addition, the increase in EBITDA is partially explained by the sale of Rio de Janeiro and Conquista farms during 2Q18, which contributed with $36.2 million in capital gains.
- Net Income on a year-to-date basis was a loss of $19.0 million, compared to a $9.5 million gain recorded in the same period of last year. Higher EBITDA generation, as a result of better economic performance was offset by: (i) the $196.1 million non-cash loss derived from the revaluation of our U.S dollar denominated financial debt, measured in local currency; coupled with (ii) a $22.6 million loss resulting from the application of IAS 21: "The Effects of Changes in Foreign Exchange Rates" .
- Adjusted Net Income, by definition, excludes: (i) any non-cash result derived from bilateral exchange variations, (ii) any revaluation result from the hectares held as investment property, (iii) any inflation accounting result; and includes (iv) any gains or losses from disposals of non-controlling interests in subsidiaries whose main underlying asset is farmland (the latter is already included in Adj. EBITDA). We believe Adjusted Net Income is a more appropriate metric to reflect the Company´s performance. During the first nine months of the year, Adjusted Net Income reached $108.2 million, $73.1 million higher compared to 9M17.
- Independent Farmland Appraisal Report: As of September 30, 2018, Cushman & Wakefield (C&W) updated its independent appraisal of Adecoagro´s farmland. Adecoagro´s subsidiaries held 252,104 hectares valued by C&W at $846.7 million. Net of minority interests, Adecoagro´s land portfolio consists of 231,712 hectares valued at $790.6 million. Without considering the sale of farmland in Brazil, the total value of our land portfolio reached $829.7 million, or 1.6%. Lower land prices in Uruguay following five years of low crop prices- resulting in deterioration of crop margins-, explain the decrease. At the same time, higher margins in Argentina - as a result of the sharp depreciation of the Argentine Peso partially offset by the reimplementation of export taxes - are not reflected in the valuation of the farmland in Argentina because not many significant transactions throughout the year materialized. Factoring the sale of Rio de Janeiro and Conquista farms, which together contributed with $38.5 in value, the year-over-year value decrease totaled $54.1 million, or 6.0%
- Farmland Revaluation: As of September 30, 2018, the Company changed its accounting policies for its farmland. It is now recognized at fair value following the annual update of Cushman & Wakefield´s independent appraisal. It´s worth highlighting that, before this revaluation, farmland was booked at historical cost in local currency. Accordingly, the book value ($69.1 million as of June 30th), did not properly reflect the actual value of our farmland portfolio. Higher margins, as a result of the ongoing implementation of best practices and cutting edge technology - the essence of our land transformation process - were reflected in the valuation. Furthermore, every time the Argentine peso depreciated, we registered a decrease in the Company´s Equity, measured in U.S. dollar. For more information regarding the change in accounting polices, please refer to page F-25 in our Financial Statements
From an accounting perspective, there is a distinction between the hectares that are being leased to third parties from those that are not. Leased land is generally not suitable for agriculture production and is mainly used for cattle ranching, and is treated as Investment Property (IP), while the others are treated as Property, Plant & Equipment (PP&E). From an accounting standpoint the revaluation results of hectares treated as PP&E are not recorded in the Profit and Loss Account. Instead, they are directly credited to "Revaluation Surplus" line in shareholder´s equity - we registered a $422.9 million surplus, net of deferred taxes, as of September 30th. In contrast, those related to IP are recorded in "Other Operating Income". We are not including this revaluation results in the Adj. EBITDA or in the Adj. Net Income. It´s worth remembering that results related to the sale of land are registered under the Land Transformation segment. Please refer to page 30 for a full definition of these concepts.
- 5-Year Plan Update: The expansion of our cluster in Mato Grosso do Sul is proceeding according to plan. A total of 33,000 hectares have been secured for planting so far, representing 70.5% of the total hectares needed to fully supply the 3 million tons of additional crushing capacity. It´s worth noting that we managed to negotiate the existing terms and conditions for all the new contracts. Low rates constitute one of our main competitive advantages which allow us to be one of the lowest and efficient sugar, ethanol and energy producers within the space. Planting operations are also well underway. As a matter of fact,17,500 hectares have already been planted. We feel very confident that we will be able to lease the remaining hectares throughout 2019. At an industry level, investments in Angelica, as previously announced, are already done and the mill reached a nominal crushing capacity of 1,050 tons/hour. As for Ivinhema mill, investments to increase nominal crushing capacity up to 1,400 tons/hour, are well underway. We expect to conclude them during 2019.
- Milk Processing Facilities Investment Update: As of September 12, 2018, Adecoagro announced the withdrawal of its joint-venture offer to SanCor, and submitted a new investment proposal to acquire two milk processing plants and two trademarks. This new offer was formally approved by the constituent member of the Cooperative on October 31. Closing, however, still remains subject to the satisfaction of certain conditions precedent. The transaction will allow us to benefit from synergies of our efficient free stall production system, while at the same time provide us with the necessary flexibility to divert sales into the export and domestic market, based on relative profitability with a view to generate attractive returns.
- Application of IAS 29 in financial reporting of Argentine subsidiaries: As of 2Q18, Argentina´s 3-year accumulated Consumer Price Index (CPI) exceeded 100%. As a result, all necessary conditions set by IAS 29 "Financial Reporting in Hyperinflationary Economies" to be deemed as a hyperinflationary economy were met in Argentina. Accordingly, financial statements of Argentinian Companies need to comply with IAS 29 . This standard requires, as a way to overcome the deficiencies of historical cost basis accounting in high inflation economies, to restate all non-monetary items by applying a general price index since the day they were booked. Many of the historical numbers, under an inflationary scenario, are not economically relevant as prices changed since they were incurred. Figures are simply not additive as they embody different purchasing power.
At the same time, the standard also requires that all items in the statement of income be expressed in terms of the measuring unit current at the end of the reporting period, consequently, results of operation measured in Argentine Pesos for each monthly reporting period are adjusted for inflation by the applicable monthly inflation rate each month.
To properly assess the implications of adopting this new accounting standard, it´s convenient to distinguish between the impact of inflation accounting per se (IAS 29) and translation effects (IAS 21).
Inflation Accounting Effects
The impact of applying IAS 29 differs across the financial statements, as follows:
The balance sheet measured in local currency, will increase with the new standard. All non-monetary items (including equity) need to be restated. This will result in an increase in shareholder´s equity.
Margins measured in local currency, will be reduced since the accrued cost will now be higher. Inventories are now booked at a higher value. This will result in a reduction in EBITDA, measured in local currency.
The impact on net income is less obvious. The effect will depend on the Company´s monetary position. Since monetary assets and liabilities are not adjusted by the general inflation index, they are, by definition, exposed to inflation. In this line, if the Company´s net monetary position is positive, i.e. more monetary assets than liabilities, a negative result will be generated, other things equal.
The implications of the standard are quite different when accounting for the translation effects. In paragraph 42, IAS 21 establishes that, "…all amounts shall be translated at the closing rate at the date of the most recent statement of financial position…" Under this standard, booked results, after adjusted for inflation pursuant to IAS 29, must then be converted into U.S dollar at the closing exchange rate for such monthly reported period.
This conversion changes every prior reported monthly statement of income in U.S dollar as each monthly amount is readjusted under IAS 29 for inflation as described above and reconverted at different exchange rates for each monthly reported period under IAS 21. As a result the impact of monthly inflationary adjustments and monthly conversion adjustments vary the results of operation month to month until year end.
Results in the following Earnings Release have been prepared following the methodology applied for our Segment presentation in our Financial Statements (IFRS 8 Operating Segments).We have included results of operation based on monthly data that has been adjusted for inflation and converted into US dollars (i.e. hard currency) each month but not readjusted as described above under IAS 29 and IAS 21. The Company believes that it is more useful and accurate to remain results unaltered, once translated into hard currency. For more information please refer to Financial Note #3 "Segment Information" in our Financial Statements for more information.
Adjusted EBITDA is defined as (i) consolidated net profit (loss) for the year, as applicable, before interest expense, income taxes, depreciation and amortization, net gain from fair value adjustments of investment property land, foreign exchange gains or losses, other net financial expenses; and (ii) adjusted by profit or loss from discontinued operations if any; and (iii) adjusted by those items, that do not impact profit and loss, but are recorded directly in shareholders' equity, i.e., (x) the gains or losses from disposals of non-controlling interests in subsidiaries whose main underlying asset is farmland , reflected under the line item: "Reserve from the sale of non-controlling interests in subsidiaries; and (y) the net increase in value of sold farmland, which has been recognized in either Revaluation surplus or retained earnings.
Non-Gaap Financial Measures: For a full reconciliation of non-gaap financial measures please refer to page 30 of our 3Q18 Earnings Release found on Adecoagro's website (ir.adecoagro.com)
Forward-Looking Statements: This press release contains forward-looking statements that are based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements can be identified by words or phrases such as "anticipate," "forecast", "believe," "continue," "estimate," "expect," "intend," "is/are likely to," "may," "plan," "should," "would," or other similar expressions.
These forward-looking statements involve various risks and uncertainties. Although we believe that our expectations expressed in these forward-looking statements are reasonable, our expectations may turn out to be incorrect. Our actual results could be materially different from our expectations. In light of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this press release might not occur, and our future results and our performance may differ materially from those expressed in these forward-looking statements due to, inclusive, but not limited to, the factors mentioned above. Because of these uncertainties, you should not make any investment decision based on these estimates and forward-looking statements.
The forward-looking statements made in this press release relate only to events or information as of the date on which the statements are made in this press release. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events.
To read the full 3Q18 earnings release, please access ir.adecoagro.com. A conference call to discuss 3Q18 results will be held on November 16, 2018 with a live webcast through the internet:
November 16, 2018
9 a.m. (US EST)
11 a.m. Buenos Aires
12 p.m. Sao Paulo
3 p.m. Luxembourg
Participants calling from the US: Tel: +1 (844) 435-0324
Participants calling from other countries: Tel: +1 (412) 317-6366
Access Code: Adecoagro
Conference Call Replay
Participants calling from the US: Tel: +1 (877) 344-7529
Participants calling from other countries: Tel: +1 (412) 317-0088
Access Code: 10125664
Investor Relations Department
Charlie Boero Hughes
Juan Ignacio Galleano
Tel: +54 (11) 4836-8624
Adecoagro is a leading agricultural company in South America. Adecoagro owns over 247 thousand hectares of farmland and several industrial facilities spread across the most productive regions of Argentina, Brazil and Uruguay, where it produces over 1.9 million tons of agricultural products including sugar, ethanol, bio-electricity, milled rice, corn, wheat, soybean and dairy products, among others.
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