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Edited Transcript of AGRO earnings conference call or presentation 15-Mar-19 12:00pm GMT

Q4 2018 Adecoagro SA Earnings Call

Luxembourg Mar 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Adecoagro SA earnings conference call or presentation Friday, March 15, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos A. Boero Hughes

Adecoagro S.A. - CFO

* Mariano Bosch

Adecoagro S.A. - Co-Founder, CEO & Director

* Renato Junqueira Santos Pereira

Adecoagro S.A. - Director of Sugar & Ethanol Operations

* Walter Marcelo Sanchez

Adecoagro S.A. - Co-Founder, Chief Commercial Officer & Director

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Conference Call Participants

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* Danniela Chambô Eiger

BofA Merrill Lynch, Research Division - Associate

* Fernanda Perez Da Cunha

Citigroup Inc, Research Division - Senior Associate

* Javier Martinez de Olcoz Cerdan

Morgan Stanley, Research Division - MD

* Juliana Oliveira

BofA Merrill Lynch, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro's Fourth Quarter 2018 Results Conference Call.

Today with us, we have Mr. Mariano Bosch, CEO; Mr. Charlie Boero Hughes, CFO; and Mr. Juan Ignacio Galleano, Investor Relations Manager. We would like to inform you that this event is being recorded. (Operator Instructions)

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 would like to turn the conference over to Mr. Mariano Bosch, CEO. Mr. Bosch, you may begin your conference.

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO & Director [2]

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Good morning, and thank you for joining Adecoagro's 2018 fourth quarter results conference. We are very pleased to present our 2018 financial and operational results.

As you may all be aware, 2018 has been a challenging year. On the one hand, the harvest in Argentina was affected by one of the worst droughts in the last 50 years. On the other hand, sugar prices traded at the lowest levels for the last 5 years. In this scenario, however, we delivered strong results in all of our businesses. This was only possible, thanks to our continuous focus on efficiencies and in being the lowest cost per user.

Starting with the Sugar, Ethanol & Energy business. As part of our 5-year plan, we reached total crushing of 11.4 million tons, that's 11% higher than the previous year, continuing to reduce our cost of production. As a matter of fact, that cost was $0.094 per pound, one of the lowest in the industry. At the same time, we continued maximizing the production of ethanol during the fourth quarter in order to profit from higher ethanol-related prices. On the full year basis, 74% of total TRS produced went to ethanol, making us one of the producers with a highest degree of flexibility. Considering that, during 2018 ethanol traded at a 25%, 30% average premium to sugar. This is a clear competitive advantage as we are maximizing returns.

As for our expansion project, sugarcane availability is the critical factor. In this line, 90% of the total hectors needed to fully supply the 3 million tons of growth of crushing capacity have been successfully secured. More importantly, terms and conditions were maintained and in some cases, even improved. So this is the possibility to continue reducing our cost of production.

Moving now to our Farming and Land Transformation business. All of our crops were successfully seeded and are developing in excellent conditions. These are the months of the year where most of the yields are refined and crops are advancing great.

Regarding the dairy business, we continue delivering strong operational results. Cow productivity continues at extremely high levels, even factoring for the new operational challenges that arise as we populate the third free-stall facility. And now, I would like to spend a couple of minutes to provide you with additional clarity with regards to our recent transaction on this dairy segment.

On February 11 of this year, we completed the acquisition of 2 milk processing plants and 2 trademarks for a total amount of $45 million. For the sake of clarification, we acquired the assets, facilities and trademarks free of debt and any other liabilities on a cash-for-asset transaction. Both plants are well equipped and strategically located. One is in the city of Morteros, Province of Cordoba, right in the center of Argentina's largest dairy basin. This plant is one of the most efficient facilities in the country to produce powder milk and cheese. The other located in the city of Chivilcoy, Province of Buenos Aires, is equipped with the latest technology and is fully devoted to fluid milk production. Its geographic footprint is excellent as it is half between our dairy free-stall facilities and the city of Buenos Aires, the largest dairy consumer market in the country. The trademarks, Las 3 Niñas and Angelita, are brands well recognized in Argentina and represent a solid commercialization platform for our dairy products.

We are confident that this transaction is accretive to our shareholders as we expect to generate very good results enhancing our existing dairy segment by leveraging on the high quality and stable production of our raw milk. The combination of both plants provide us with a flexibility to transform our raw milk into products that we can sell on the export or the domestic market based on the relative profitability: powder milk for the export market, fluid for domestic market and cheese for both markets. Both these products will be manufactured under our sustainable production system guaranteeing food traceability and the highest production standards to our final clients enabling us to develop a reliable and long-term commercial relation with our final clients.

As a summary, 2018 has been a good year, generating results in line with results outlined in our 5-year plan. We have now started a new year full of challenges. But most importantly, by the end of 2019, we shall end the deployment of major CapEx under the 5-year plan and expect to commence generating a strong free cash flow position. In this regard, the company is already analyzing the implementation of a new policy to distribute returns to our shareholders.

To conclude, I would like to finish by reiterating my gratitude to all the operational and management teams with the thanks to their daily efforts and hard work that we have become one of the low-cost producers of food and renewal energy.

Now I will let Charlie walk you through the numbers of the quarter.

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Carlos A. Boero Hughes, Adecoagro S.A. - CFO [3]

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Thank you, Mariano. Good morning, everyone.

Let's start on Page 4 with a brief analysis on the rains in Mato Grosso do Sul. As you can see on the left side of the chart, rainfalls in the fourth quarter of 2018 were only 7% lower than the previous year. However, rains were evenly distributed last year. Indeed, rains in November and December were significantly lower compared to the fourth quarter of 2017. This allowed us to accelerate the pace of milling, profiting from higher cane availability as we have been actively engaged in planting operations over the past 3 years as part of our 5-year growth plan. I would like to remind everyone that sugarcane cannot be harvested when the soil is wet because the heavy combines and trucks may damage the sugarcane roots and the soil, negatively affecting future yields.

Let's move to Page 5 to see the impact on our crushing activities. Total sugarcane crushed during the fourth quarter of 2018 reached 2.7 million tons, marking a 25% increase compared to the fourth quarter of 2017. This was mainly explained by 23% increase in effective milling days as a result of better weather conditions, coupled with enhanced operational efficiencies. On a yearly basis, sugarcane milling increased by 11%, driven by higher sugarcane availability, together with higher operational efficiencies in all of our mills as a result of industrial crushing capacity enhancement in Angelica mill coupled with a 5% increase in effective milling days.

Please turn to Page 6, where I would like to highlight our productivity at the fields. We remain fully focused on agricultural productivity since we understand that it's one of the most important drivers for becoming a low-cost producer. Over 70% of total production costs are related to sugarcane production at the field. As a result, sugarcane yields in 2018 reached 89 tons per hectare, 5% higher compared with 2017. In addition to enhanced agricultural efficiencies, higher yields were explained by adequate weather conditions during the first semester of 2018, which favored cane development. TRS content reached 128 kilograms per ton, slightly above the previous year. The combination of those 2 effects resulted in TRS production per hectare of 11.3 tons, 5% higher than last year.

Let's move ahead to Slide 7, where I would like to discuss our production mix. As you can see in the top-left chart, during 2018, anhydrous and hydrous ethanol in Mato Grosso do Sul traded at an average price of $0.162 and $0.155 per pound sugar equivalent, which represents a 32% and 26% premium to sugar, respectively. In this scenario, all our efforts focused on maximizing ethanol production since day 1 to benefit our higher relative prices. Results are evident. On 2018, 74% of our TRS production was diverted towards ethanol, explaining the 40% increase in ethanol production year-over-year as you can see in the top-right chart. Those -- it's also important to highlight that the fourth quarter of 2018, ethanol mix in production reached 80%, an all-time record. As a result of this strategy, ethanol accounted for 59% of the total 2018 EBITDA generation in Sugar, Ethanol & Energy business, while sugar accounted for 27%. This constitutes a significant competitive advantage since it enabled us to have -- to maximize returns by selling the product with the highest marginal contribution.

Let's please turn to Slide 8, where I would like to discuss our sales. On an yearly basis, due to our strategic decision to maximize ethanol production, selling volumes increased 45%, reaching 637,000 cubic meters. Ethanol total sales increased by 34%, fully explained by higher selling volumes, partially offset by lower selling prices in U.S. dollars. In effect, as a result of the 17% depreciation in the Brazilian real, ethanol prices measured in U.S. dollars decreased by 9%, but this traded as a significant premium to sugar.

As of December 31, 2018, our ethanol inventory was 100,000 cubic meters, 45.4% higher year-over-year. Our current strategy though was in line with the one we pursued last year. Indeed, we carried 13% of our total ethanol available produced compared to the 14% that we carried in 2017. Ethanol stocks were held until February 2019 allowing us to capture higher prices.

In the case of energy, selling volumes reached 772,000-megawatt hour, marking an 11% decrease. This is mainly explained by the reduction of third-party commercialization activities. Net of this sales, energy exported in the grid totaled 705,000-megawatt hour, in line with the same period of last year.

Sugar sales volumes were 451,500 tons, 45% lower than 2017. Average net selling prices reached $0.129 per pound, 23.6% lower compared to 2017. Lower prices are primarily explained by global supply and demand dynamics. As a result, net sales reached $127.8 million, 58% lower compared to 2017.

Let's please turn to Slide 9, where I would like to discuss total cost of production. Total cost of production depicts, on a cash basis, how much it costs us to produce 1 pound of sugar and ethanol in sugar equivalent. Maintenance CapEx is included in the calculation since it's a recurring investment, necessary to maintain the productivity of the sugarcane plantation. As we are calculating sugar and ethanol cost, energy is deemed a by-product and thus deducted from total costs. As for the tax recovery line, it includes the ICMS tax incentive that the state of Mato Grosso do Sul granted us until 2032.

As shown in the table, total cash cost in 2018 marked a 22.6% reduction on a per unit basis, reaching $0.094 per pound of sugar equivalent. This decrease was explained by the 11% higher crushing activity compared to 2017, allowing us to dilute fixed cost, coupled with enhanced agricultural efficiencies that contributed to reduce harvest cost. In addition, unit costs, measured in U.S. dollars, were further reduced by the year-over-year depreciation of the Brazilian real.

Finally, to conclude with the Sugar, Ethanol & Energy business, please turn to Slide 10, where I would like to discuss financial performance. On a cumulative basis, adjusted EBITDA in 2018 decreased 3.6%, reaching $238 million. Adjusted EBITDA was positively affected by: a 21.7% reduction in total cash cost on a per unit basis, a result of enhanced agricultural and industrial efficiencies, coupled with the depreciation of the Brazilian real; and the $12.9 million higher gain derived from the mark-to-market of our commodity hedge position. These positive effects were offset by lower sugar sales, coupled with our $45.7 million noncash loss from the fair value of the unharvested cane. Furthermore, adjusted EBITDA margin net of third-party commercialization reached 56.1% in 2018 compared to 51.9% in 2017.

Adjusted EBITDA during the fourth quarter of 2018 was $45.4 million, 44.1% lower compared to the fourth quarter of 2017. Lower cost of production driven by higher volumes and enhanced efficiencies, coupled with the positive mark-to-market of our commodity hedge positions, were offset by lower sales and $31.4 million noncash loss derived from the fair value of the unharvested cane.

I would now like to move on to the Farming business. Please direct your attention to Slide 12. At the end of the fourth quarter of 2018, Adecoagro finished its planting activities for the 2018 and '19 harvest year. We planted 230,000 hectares, 1.2% lower than the previous harvest season. As of the end of February of 2018, a total of 100% of the targeted area has been seeded. Since mid-December of 2018, Argentina received above average rainfalls partially affecting seeding operations. Although planted area is expected to slightly decrease compared to the previous harvest season, rains were extremely beneficial for the proper development of most of the crops, thus increasing overall potential yields. This is the reason why we estimate the current 2018 and '19 harvest season to be a strong one with production levels exceeding those registered in the previous season.

Let's move to Page 13, where I would like to walk you through the financial performance of our Farming and Land Transformation business. As you may see on the chart, on a year-to-date basis, adjusted EBITDA for the Farming business totaled $96 million, marking a 90% increase year-over-year. The improvement in financial performance is primarily explained by higher achieved margins in our Crops and Rice businesses as a result of enhanced operational efficiencies coupled with cost dilution, measured in U.S. dollars, as a result of the sharp depreciation of the Argentine peso, and the sale of the Rio de Janeiro and Conquista farms during the second quarter of 2018 has generated $36.2 million in EBITDA compared to a null result in 2017. These positive results were partially offset by the $5.1 million reduction in results in our dairy business, mainly driven by lower average selling prices, measured in U.S. dollars.

Let's please turn to Slide 14, where I would like to walk you through the rationale behind the acquisition of the 2 milking processing facilities. As you may all be aware, we are highly efficient in the production of raw milk. Productivity amounts to 36 liters per cow per day, far from the country average of 20 liters per cow per day. This is a result of having developed a revolutionary combined production system, while we not only control animal feed, but also cow comfort. As already presented to the market, we are investing to double production expecting to reach over 118 million liters of production by 2021. With these production levels, it is more to vertically integrate. Controlling different links of the chain will allow us to enhance efficiencies and increase margins. At the same time, apart from synergizing with our already efficient upstream operations, processing the raw milk will enable us within the flexibility to sell into the export and domestic markets based on relative profitability with a view to generate attractive returns. As you can see in the map on the left, both facilities are strategically located: one in the city of Morteros, Province of Cordoba, right where the largest dairy basin of the country is based; the other plant located in the city of Chivilcoy, Province of Buenos Aires, is halfway between our dairy free-stalls facilities and the City of Buenos Aires, the largest dairy market. We are confident that this transaction will be accretive to our existing shareholders as expected ROIC lies above our cost of capital.

Let's move to Page 15, where I would like to walk you through our Land Transformation business. In January of 2019, we completed the sale of Alto Alegre Farm, located in the Tocantins, Brazil. The aggregate selling price reached $16.8 million for a total of 6,080 hectares, from which 3,065 are croppable. I would like to highlight that the farm was sold at a 34% (sic) [33%] premium to the latest Cushman and Wakefield´s independent farmland appraisal. Over the last 12 years, we have been able to generate gains of over $200 million by strategically selling at least one of our fully matured farms per year. Monetizing a portion of our land transformation gains allow us to redeploy the capital to highly yielded activities, enabling us to continue growing and enhancing shareholder value.

Let's now turn to Page 16, which shows the evolution of Adecoagro's consolidated operational and financial performance. On a consolidated basis, net sales in 2018 reached $770 million, 14% lower year-over-year. This, as we have already seen, is mainly explained by the combination of lower sugar and energy selling volumes, coupled with lower sugar and ethanol prices, measured in U.S. dollars. Adjusted EBITDA in turn totaled $314 million, marking a 14% increase compared to the same period of last year. Positive results were achieved in all of our businesses. As previously explained, the good performance of our Crops and Rice businesses were primarily the result of enhanced agricultural and industrial efficiencies, coupled with lower production costs measured in U.S. dollars. As for Sugar, Ethanol & Energy business, positive results were driven by higher crushing volumes, which allowed us to dilute fixed costs, coupled with the gain derived from the mark-to-market of our commodity hedge position.

To conclude, please turn to Slide 17 to take a look at our net debt position. As you may see in the left chart, our gross indebtedness as of December 31, 2018, stands at $863 million, while net debt stands at $589 million, 8.4% lower quarter-over-quarter and 7.4% higher year-over-year. The increase in net debt from a yearly perspective is primarily explained by our investment program. It's important to highlight that due to the growth in adjusted EBITDA, however, net debt ratio reached 1.87x, 5.5% lower year-over-year. I'd like to mention that our debt is very well structured in the long run with an average maturity of 6 years.

Thank you very much for your time. We are now open to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Daniel Eiger (sic) [Danniela Eiger] with Bank of America.

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Danniela Chambô Eiger, BofA Merrill Lynch, Research Division - Associate [2]

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I have 2 questions. The first on sugar and ethanol business. I wanted to ask you if you can comment on your outlook for the next season in terms of yields given the -- how the weather has evolved in the beginning of the year here in Brazil? And also in terms of the mix, should we expect you to continue maximizing ethanol in which a mix similar to what we saw in 2018? That is my first question. And the second question, just wanted to do a follow-up on your comments, Mariano, regarding free cash flow, just to make sure I understand. For 2019, we should still expect some limited cash flow generation as you should deliver the pick of your investment cycle of your 5-year plan, and in 2020 we should start to see a stronger free cash flow generation, is that it? And also, regarding the potential change on your distribution policy, that would -- if that is indeed changed, we would see dividend payments already in 2020.

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO & Director [3]

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Danniela, thank you for your questions. I'm going to take the last part of your question and then Renato will get into details on the first part of your question regarding the sugar and ethanol yields and mix. So regarding the cash flow generation, you are absolutely correct, 2019 is a year where we are doing most of the CapEx of the 5-year plan, so we finished most of the CapEx of the 5-year plan. So the cash flow generation will be strong in 2020. So regarding when is it that we are analyzing the way on how to pay this cash flow to our shareholders and how is it that we are going to be implementing is what we are currently discussing. We are discussing this between the senior management and board, and we'll figure out how is it that we are going to be paying this strong cash flow generation in 2020. And we start that same year or how -- and how to pay, this is a discussion that is happening this year. Then on the yields and the mix for this current year, Renato can you answer Danniela's question, please?

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Renato Junqueira Santos Pereira, Adecoagro S.A. - Director of Sugar & Ethanol Operations [4]

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Yes. So regarding the yields, similar to the rest of the Center-South region, the yields were negatively impacted by drier weather in December and January. However, in February and March, rains have returned to its historical level, so improving our sugarcane fields outlook. Therefore, we expect yields between 85 tons and 90 tons per hectare, considering normal weather conditions from now on. Regarding the mix, we should keep maximizing it in our views. As in our view, ethanol should continue to be the most profitable in '19. The combination of rising demand and stagnant production should lead to a tight S&D scenario consequent to results in the high historic levels compared to '18. Furthermore, as the largest portion of our ethanol volumes come from Mato Grosso do Sul, the tax rebate provided by the state should keep us maximizing ethanol. As a matter of comparison, hydrous in Mato Grosso do Sul is currently equivalent to $0.16 per pound and anhydrous to $0.17 per pound, a premium was 29% and 37% over sugar, respectively. It's important to highlight that our ethanol flexibility is higher compared to the average of the Center-South. In 2018, we were able to reach 75% ethanol mix while the Center-South average was 65%.

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Danniela Chambô Eiger, BofA Merrill Lynch, Research Division - Associate [5]

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That's super clear. And if I could only do a followup on the first question. You mentioned about distribution and how about share buybacks? Are you also looking into that as you wouldn't need to change anything like approve any policy change, right?

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO & Director [6]

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Yes, Danniela. We are also looking into that. That's why I'm talking about returning capital to shareholders. So we are analyzing what would be our new policy in terms of dividends and buybacks and that's, of course, is both analyzed when we are making this discussion.

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Operator [7]

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(Operator Instructions) The next question comes from Javier Martinez with Morgan Stanley.

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Javier Martinez de Olcoz Cerdan, Morgan Stanley, Research Division - MD [8]

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Sorry to keep asking again about the dividend. In my numbers, you are going to be able to generate more than 20% free cash flow yield soon and with low risk. So Mariano, what is the discussion? What is the -- so I don't understand what is the -- so can you give us some color on the nature of the discussion, on the points of the discussion? Why do we have a discussion -- do we have any risk that you announce a new expansion plan in 1, 2 years? Or you are going to pay dividends to the shareholders?

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO & Director [9]

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No. It's clear that we are going to return capital to our shareholders. That is absolutely clear, and there is no discussion about that. So what we are discussing is how is it that we are going to implement that and at what time, at what point of 2020. So in 2020, we are going to be and we are very confident that we are going to be in a strong cash position. So assuming that in 2020 we are in that strong cash position, we are going to be returning capital to our shareholders. That's no discussion about. The discussion is how to implement this policy, how much dividend, how much buyback and how to structure that. That's the discussion that is within our company today, including board and senior management.

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Javier Martinez de Olcoz Cerdan, Morgan Stanley, Research Division - MD [10]

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Okay. So you are coming with a proposal to the board probably for April this year, and we will know we have a decision on this probably after April, that's the idea?

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO & Director [11]

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We don't know exactly when is it that we are going to be clarifying what our policy is going to be. I would like to -- we have a clear view that 2019 is where we need to finish our 5-year plan. And so on '19, there is no major decision to be taken. So by the end of '19, we should know exactly how is it that we are going to distribute dividends or buybacks or both in 2020. So that's why I don't see a hurry for that to happen in April of this year. I think by the third quarter of this year, we should be clarifying to the market exactly how is that we are going to be returning capital to our shareholders.

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Javier Martinez de Olcoz Cerdan, Morgan Stanley, Research Division - MD [12]

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Okay, clear. A question now on SanCor. So now that you have the actual...

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO & Director [13]

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SanCor has nothing -- just to clarify, SanCor has nothing to do with that. Is it clear, Javier?

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Javier Martinez de Olcoz Cerdan, Morgan Stanley, Research Division - MD [14]

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Yes, yes, yes.

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO & Director [15]

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So the question about the dairy plants, if you want to ask any question about the dairy plants or the dairy segment, happy to answer, and we are very happy to talk about the dairy segment.

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Javier Martinez de Olcoz Cerdan, Morgan Stanley, Research Division - MD [16]

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Yes, agree. So it's a parallel question. It's a new question. It's on the -- I'm trying to understand, I mean, how fast and how far the generation of synergies is going to be happening on SanCor? So I'm trying to understand if SanCor already going to generate incremental EBITDA in 2019 so to try to -- because it's a new business and so we have less visibility on that. So how EBITDA is going to be impacted by -- if you can give us some color on that will be helpful.

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO & Director [17]

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Yes, of course. That's, again to clarify, we never thought about the impact on SanCor. SanCor is a different company. We didn't acquire SanCor. That's a totally different company.

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Javier Martinez de Olcoz Cerdan, Morgan Stanley, Research Division - MD [18]

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No, what I'm talking, not about SanCor, I'm talking about the plants, about the...

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO & Director [19]

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Okay. Now we are talking. Okay, so we are talking about 2 plants and as we explained in my introduction, I think Charlie's detailed explanation on how this work has synergized and what is the profitability that we expect from these 2 plants in the synergy with the rest of the dairy segment. We expect to generate about 20% return, 20% to 25% return on the CapEx that we are investing today. We are investing this $45 million that if we include some additional CapEx or working capital, we actually are talking about the round $50 million. So if we are expecting to get 20% to 25%, we are expecting to reach to -- between $10 million to $12 million or $15 million of EBITDA once stabilized. We expect to stabilize this in 2, 3 years. That's the timing on when we expect to stabilize and to generate this type of EBITDA. How is it that this will impact in 2019 and '20? In '19, we can expect that this is the takeover moment, the transition year. So in '19, we shouldn't expect a lot of result. But in 2020, it's clear that we should expect more near the stabilized number. So 2019 is the year where we are starting and we don't want to compromise, and we are being very conservative on this 2019 year. But in 2020, we should be more near the stabilized place than what is going to be 2019.

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Javier Martinez de Olcoz Cerdan, Morgan Stanley, Research Division - MD [20]

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So 2020, you have already positive EBITDA? 2019...

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO & Director [21]

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We do expect positive EBITDA in 2019 also. In 2019, we do expect positive EBITDA, but not relevant EBITDA as we do expect in 2020. And in 2021 and 2023 is where we expect to be stabilizing this business on the numbers that we just talked.

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Operator [22]

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Your next question comes from Juliana Oliveira with Bank of America.

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Juliana Oliveira, BofA Merrill Lynch, Research Division - Analyst [23]

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So I want to understand the strategy on the higher cash position. Are you planning to use this cash increase to finance the 5-year plan? My concern is whether this use of cash could pressure leverage? That's it.

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO & Director [24]

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Thank you, Juliana. I'm -- Charlie will answer your question.

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Carlos A. Boero Hughes, Adecoagro S.A. - CFO [25]

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Juliana, we have already spent the money to -- for the acquisition of the 2 milking plants, and we don't expect that we will be increasing significantly our leverage level as this acquisition will be financed by the cash that we are generating at the operation keeping in mind that net cash from operation in 2018 is roughly $80 million. This is after paying taxes, working capital, maintenance CapEx and interests. So a part of that cash that we are generating at the operation will be used to finance our expansion CapEx, which is aligned and in compliance and on schedule and on budget with our 5-year growth plan. So we maintain our objective, our target to be at 2x net debt EBITDA ratio regarding our leverage levels.

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Operator [26]

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(Operator Instructions) The next question comes from Fernanda Cunha with Citibank.

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Fernanda Perez Da Cunha, Citigroup Inc, Research Division - Senior Associate [27]

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I have a question on the crop side. You mentioned on the press release that U.S. and China has a temporary truce, right, into trading tension. What can we expect in terms of prices in the next 6 months, please? And the second question is regarding ethanol hedge. We have been hearing from a lot of your peers that you have been accessing the market to hedge a slightly higher amount of ethanol, and I'm just wondering if you're following the same strategy? And how can we think of average prices for the next half year?

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO & Director [28]

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Fernanda, can you repeat the first part of your question on the release that we couldn't...

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Fernanda Perez Da Cunha, Citigroup Inc, Research Division - Senior Associate [29]

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Yes.

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO & Director [30]

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Yes, that we couldn't understand well, what was the point of..

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Fernanda Perez Da Cunha, Citigroup Inc, Research Division - Senior Associate [31]

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All right, sorry. No, you mentioned on the press release, right, a temporary truce on the trade tension between U.S. and China, and I'm just wondering, how you see that affecting crop prices in the next 6 months?

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO & Director [32]

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Okay, clear. Thank you. I'm going to ask Marcelo Sanchez to answer this question.

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Walter Marcelo Sanchez, Adecoagro S.A. - Co-Founder, Chief Commercial Officer & Director [33]

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Thank you, Fernanda. Yes, we have been witnessing the impact of U.S.-China tensions in the latest trade notification within the last month. That has impacted already the prices. Since -- if you remember since the last G20 in Argentina, when the prices had spiked in the way of 20%, then the movement on the pricing went ups and downs when the possibilities of the trade was closing to a positive outcome. And now, we are in the lows of the prices already in soybean and corn mainly -- besides that, would have been -- that soy prices have been affected because the inventories are in the highest levels and that also has been adding to the growing prices. Of course, besides that, the farm position also has grown to a record short. And we think that in the next coming months that might be providing fuel to corn and soy prices, and we will be witnessing a rally if we have any weather event coming after the U.S. planting. That's basically what I can say about the impact on the trade.

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Fernanda Perez Da Cunha, Citigroup Inc, Research Division - Senior Associate [34]

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And if I may just follow up, when you say...

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Walter Marcelo Sanchez, Adecoagro S.A. - Co-Founder, Chief Commercial Officer & Director [35]

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You mentioned something about tracing ethanol, we're not doing so, that's not. Last year, we had a hedging strategy using the (inaudible), but not this time so far. I mean, we are in a level of $0.16 per pound ethanol equivalent so far, then we are speeding up the sales. In terms of the strategy that took place that we carried out in the end of December, we enjoyed the rising prices occurring February onwards that allowed us to capture almost 12% in a month from tariff premiums, and our strategy now is to take advantage of corn prices that as Renato was saying, we are in Center-South, in Mato Grosso do Sul, we are obtaining $0.16 per pound sugar equivalent. And that's basically -- I don’t know if you have any questions.

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Fernanda Perez Da Cunha, Citigroup Inc, Research Division - Senior Associate [36]

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Sorry, if I just may follow up on this last question. I don't think I understood. So when you say you are speeding up the sales, it's regarding to the 2018/2019 crop, right? I'm asking if you're doing any kind of hedges for the next crop year? So if you're taking advantage of the prices right now to hedge for your next crop year?

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO & Director [37]

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No. We are not doing hedges on the ethanol for next year. Because this says that we are speeding up our part of the current strategy of the previous crop and part of what we are harvesting this year because remember we have this continuous harvest where during January, February and March, we are crushing, and we are doing 100% of ethanol because of these relative prices. So that's what we are selling today. That is part of this year also because of this continuous harvest that we continue harvesting during summertime.

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Operator [38]

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(Operator Instructions) This concludes the question-and-answer section. At this time, I would like to turn the floor black over to Mr. Bosch for any closing remarks.

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO & Director [39]

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Okay. Thank you for your questions. Thank you for your participation, and hope to see you in our upcoming events.

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Operator [40]

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