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Edited Transcript of AGRO earnings conference call or presentation 16-Aug-17 3:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Adecoagro SA Earnings Call

Luxembourg Aug 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Adecoagro SA earnings conference call or presentation Wednesday, August 16, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carlos A. Boero Hughes

Adecoagro S.A. - CFO

* Marcelo Wayland Barbosa Vieira

Adecoagro S.A. - Director

* Mariano Bosch

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

* Renato Junqueira Santos Pereira

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

* Walter Marcelo Sanchez

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

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Conference Call Participants

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* Danniela Eiger

* Javier Martinez de Olcoz Cerdan

Morgan Stanley, Research Division - MD

* João Pedro Ribeiro Soares

Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst

* Thiago Callegari L. Duarte

Banco BTG Pactual S.A., 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 Second Quarter 2017 Results Conference Call. Today with us, we have Mr. Mariano Bosch, CEO; Mr. Charlie Boero Hughes, CFO; and Mr. Hernan Walker, 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'll 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 and Director [2]

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Good morning, and thank you for joining Adecoagro's 2017 second quarter results. We had strong results during second quarter with a 31% increase in EBITDA when compared with the same period of last year. This was mainly achieved by the constant enhancement of our agricultural and industrial operations coupled with good commercial strategy that allowed us to capture above average prices in all the commodities we produce. It's important to highlight that these results were generated in a somewhat adverse scenario with falling commodity prices and real appreciation of both the Argentine peso and the Brazilian real.

Regarding the Sugar, Ethanol and Energy business, we had a rainy quarter, which on the one hand was very positive for the development of our sugarcane resulting in higher expected yield, but on the other hand, delayed the harvesting pace, however, offset by the increase in crushing capacity. Our expansion project is being executed at high speed, nominal crushing capacity in Angelica was increased by 17% on a per-hour basis, and works in Ivinhema mill have already began. The expansion of our sugarcane plantation to supply the new capacity is also advancing well. We have already leased over 19,000 hectares at very competitive prices. As we always highlight, the availability of sugarcane is the most relevant factor in an increase in crushing capacity, and we are in a very good position to execute the plan according to schedule. It's worth mentioning that we still expect this project to generate attractive returns, despite current sugar prices. Indeed, the marginal invested CapEx will allow us to significantly enhance efficiencies and reduce production costs.

Regarding the Farming and land transformation business, our dairy operations continue to deliver great results. We keep on improving our operational performance. We are confident that we are by far the most efficient producer in the market, producing almost 37 liters per cow per day. Prices have improved, both domestic and international. The increase in domestic prices is partially explained by Argentina's reduction in raw milk production as a result of the adverse weather conditions. However, in our specific case, during our production model, we maintain our normal production levels, despite the excessive rate, proving once again the efficiency and stability of our free-stall system.

In our Crops and Rice businesses, the harvest of our grain production is well advanced. Weather has been good for the developing of our crops. Rains were timely and abundant through the ploughing phase of each crop. However, rains brought in logistics difficulties at the time of harvest, which agricultural and commercial teams were able to handle in an efficient manner.

All the growth projects we announced are ongoing according to schedule and budget. We are confident that they will contribute to the overall performance of the company, enhancing operational and financial results.

Last, we are well aware that we need to remain focused to succeed in our main strategy, which is to maintain our low-cost production of each of the commodities we produce, and generate value to our shareholders throughout the commodity cycle.

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, where I would like to comment on the weather conditions in our cluster in Mato Grosso do Sul.

As you may see on the chart, the region suffered excess rains during April and May, which caused logistic and operational setbacks in our agricultural operations. When the sun is humid, we had to stop harvesting activities to avoid damaging the soil with heavy harvesters, tractors and trucks. It is worth pointing out that these rains were highly beneficial for sugarcane growth, increasing productive yields for the rest of the year.

Let's move to Page 5. As a result of the excess rains, we had 16% net effective milling time in the quarter, which resulted in a 9% decrease in crushing volumes. As you may see in the top left chart, excess rains were partially offset by a 9% increase in milling per day. This was driven by enhanced operational efficiencies coupled with the fact that by the end of June, we successfully completed the expansion of the Angelica milling. Angelica's crushing capacity per hour has increased by 17%, from 900 tons per hour to 1,050 tons per hour. As a result, we were able to crush 1.5 million tons of sugarcane during July in our Sugar and Ethanol operations, which is an all-time record.

On a year-to-date basis, we crushed 3.9 million tons of sugarcane, 7% below the same period of last year. Again, this is explained by the reduction in effective milling days as a result of excess rainfalls. We are confident that as we move into the dry winter season, and with our increased milling capacity, we will be able to accelerate the pace of harvest to compensate the current delays and reach full utilization of annual nominal capacity. In fact, rains throughout July and the first half of August were in line with the historical average.

Please jump to Page 6, where I would like to highlight a few agricultural productivity metrics. As you may see in the top of the chart, yield per hectare during the quarter has reached 86 tons, 22% lower than last year, mainly as a result of above average rainfalls during November 2015 through February 2016, which were highly beneficial for the 2016 crop compared to below average range during the fourth quarter of 2016 and the first quarter of 2017, which has affected the proper development of the current crop, and a longer average growth cycle for the cane harvested in 2016 compared to the current season. TRS per ton reached 120 kilos, slightly above last year, resulting in a 22% reduction in yield per hectare. As I mentioned earlier, the excess rains we experienced in April and May have been positive for sugarcane growth, so we expect higher yields during the upcoming quarters.

Let's move to Slide 7. Production during the second quarter has been negatively affected by the decrease in sugarcane crushing. As a result, sugar and ethanol production fell by 9% and 12%, respectively, resulting in a 10% decrease in TRS equivalent produced.

Energy exports only dropped by 7% since we collected and brought sugarcane straw from the fields in order to increase our cogeneration capacity and profit from higher energy prices. This explains why our cogen efficiency ratio has increased to 67-kilowatt hour per ton of sugarcane crushed.

Now let's please turn to Slide 8, where I would like to discuss sales.

Net sales during the quarter were $129.3 million, 50% higher year-over-year. In the case of ethanol, sales volumes increased by 54% compared to last year, resulting in a 79% increase in sales. This reflects our strategy of increasing anhydrous production in order to take advantage of Mato Grosso do Sul tax rebate. Average realized prices increased by 17% year-over-year. In fact, anhydrous ethanol was the product with the highest margin contribution and traded at an average premium to VHP sugar of 6% throughout the quarter.

In the case of sugar, sales volumes grew 23% year-over-year. Because most of sugar delivered was related to fixed contract entered up to 12 months ago, realized prices were 15% higher than last year. As a result, net sales increased by 41%.

Regarding Energy, sales volumes decreased by 14% compared to last year. However, we were able to capture significantly higher selling prices in dollar terms. In fact, average selling prices increased by 49%, reaching $61 per kilowatt-hour, resulting in a 28% growth in net sales.

I would like to turn to Slide 9. Here, we can see the overall financial performance of the Sugar, Ethanol, and Energy business. Adjusted EBITDA in the second quarter of 2017 reached $61.4 million, 21% higher than the second quarter of 2016. The main factors that explain the strong financial results were the increase in ethanol and sugar selling volumes, the increase in average realized selling prices in all of the products we produced, and our $21-million gain generated from the mark-to-market effect of our sugar hedge position. These results were partially offset by an 8.6% decrease in sugarcane crushing as a result of above average rainfall during April and May, as previously discussed, the appreciation of the Brazilian real, which resulted in higher production costs measured in dollars, and $7.3 million noncash loss generated from the mark-to-market valuation of our unharvested sugarcane plantation.

On a commodity basis, adjusted EBITDA for the 6 months of 2017 reached $91.6 million, 26% higher compared to the same period of last year. Adjusted EBITDA margin net of third-party commercialization was 47% compared to 58% a year ago. Lower margins are explained by the increase in costs measured in dollars, as a result of the Brazilian real depreciation, coupled with lower TRS production.

Finally, to conclude with the Sugar, Ethanol and Energy business on Page 10. I would like to comment on our Sugar and Ethanol and Energy hedging position. We have entered in hedge positions related to the current harvest, and also next year's production at very competitive prices. In the case of Sugar for the current crop, we have hedged more than 60% at an average price of $18.99 (sic) [$18.98] per pound. Regarding 2018 production, we have hedged more than 20% at an average price of $18.5 per pound. As a result of the recent sugar sell-off, the mark-to-market of our hedge positions as of June 30, 2017, resulted in a $21 million gain.

We will now turn to Slide 12 of the presentation, where I would like to give you an update on harvest of our most relevant crops.

As of the end of July, 87% of our planted area was successfully harvested. We expect to harvest the remaining area during August. On a consolidated basis, as a result of abundant and timely rainfalls throughout the ploughing period, yields were higher in all of our crops. At the same time, we were able to successfully overcome logistic difficulties related to excess rains. Regarding the new crop, towards the end of the second quarter of 2017, we will begin our planting activities. As of the end of July, over 30,000 hectares of wheat were planted and are developing normally.

Let's move to Page 13, where I would like to walk you through the financial performance of our Farming business. As you may see on the chart, on a quarterly basis, adjusted EBIT for the Farming business was $11 million, 117% higher year-over-year. This increase is mainly explained by the Crops and Dairy businesses. Adjusted EBITDA for Crops reached $7.9 million, growing 134% year-over-year. The increase is primarily explained by a 7% increase in planted area and higher crop yields coupled with a positive hedge result. Results were partially offset by a reduction in margins as a result of lower commodity prices coupled with the appreciation of the Argentine peso in real terms, thus increasing our cost of production measured in dollars.

In the case of the Dairy business, our operational performance in the quarter was very good, and we continue to see improvement in productivity as we consolidate the free-stall facilities. Net production volumes reached 21.9 million liters, marking a 1.2% increase year-over-year, driven by a 1% increase in our dairy cowherd, coupled with a slight increase in the cow productivity, reaching 35.2 liters per cow per day. Raw milk prices, on the other hand, increased by 31% as a result of lower milk production in Argentina.

Let's now turn to Page 15 which shows the evolution of Adecoagro's consolidated operational and financial performance.

On a consolidated basis, net sales increased by 35% year-over-year, mainly explained by the combination of higher selling volumes and realized prices in Sugar, Ethanol and Energy business as previously discussed. Adjusted EBITDA in the second quarter 2017 totaled $67.2 million, marking up 31.3% increase compared to the second quarter of 2016. The improvement in financial performance was primarily driven by higher selling volumes and realized prices in the Sugar, Ethanol and Energy business coupled with gains derived from the mark-to-market of our commodity hedge position. At the same time, these positive effects were offset by the appreciation in real terms of both the Argentine peso and the Brazilian real coupled with a reduction in crushing volumes. We expect Adecoagro's production volumes and financial performance to continue growing in line with historical growth, mainly driven by the consolidation of our sugarcane cluster and an increase in operational and financial efficiencies in each of our businesses.

Let's now turn to Slide 16 to take a look at our net debt position. As you may see on the left-hand chart, our gross indebtedness as of June 30, 2017 stands at $794 million, and net debt stands at $574 million, 8% lower compared to the same period of last year. I'd like to highlight that 68% of our debt is in the long-term, composed mainly of loans from multilateral banks at very competitive rates.

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) Our first question comes from Danniela Eiger of Bank of America Merrill Lynch.

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Danniela Eiger, [2]

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I have 2 questions. First, it's been a while since you don't sell lands since the end of 2015, if I'm not mistaken. I wanted to understand a little bit on how is the land market? How you are seeing the perspective going forward into the second half of the year? And also, what is your expectation for cash generation in the second half, given cane crushing accelerating?

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

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Excuse me, Danniela. Can you repeat the second part of your question, please?

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Danniela Eiger, [4]

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Sure. It's about your expectation for cash generation into the second half of the year, given that you're accelerating cane crushing?

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO and Director [5]

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Okay, okay. So I'm going to start with the first part of your question regarding the sale of the land. And it's been a while since we haven't sold land because how we think about the selling the land is thinking on the future returns on each one of the assets. So once we determine what the future returns are, it's a price at which we accept -- we are ready to sell that land. So the market has not reflected what we believe that's the case, and that's why we haven't sold the land. Having said these, we are now negotiating 2 or 3 farms, where we do expect to reach this level where the price is enough, where we can reallocate that capital into something more with higher returns. So that's why we do expect to sell land in the second half of the year. That's the first part of the question. And then Charlie will address the second part of the question according to the cash generation on the increase of the cane crushing.

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Carlos A. Boero Hughes, Adecoagro S.A. - CFO [6]

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Hi, Danniela, thank you for your question. As it happened during the last 3 years, we have a seasonality on how we generate the cash. Typically, during the first semester, we consume cash. And we move forward sales of, basically, sugar and ethanol. If you look at what happened last year, in the last quarter, we generated most of the cash as we sold more than 40% of the TRS that we produced during the year. So I would expect -- and we're confident that we will be -- as we have been doing in the last 2 to 3 years generating the cash on the second semester and mainly on the fourth quarter.

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Operator [7]

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Our next question comes from João Soares of Bradesco.

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João Pedro Ribeiro Soares, Bradesco S.A. Corretora de Títulos e Valores Mobiliários, Research Division - Research Analyst [8]

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I have 2 questions. The first one is regarding ethanol prices. I'm just trying to understand here a little bit your hedging and how you expect prices to behave going forward given the recent rise in fiscal themes and this potential (inaudible) looking at your number this year, you're climbing 6.5% year-over-year in BRL, and correct me if I'm mistaken, but this is really positive given you see prices plunging year-to-date given the high imports. So if you could just talk a little bit about how you manage to keep such positive pricing and how you expect this to behave going forward. And my second question, if you could provide a little bit, an update on your M&A strategy. I understand in your Investors Day, you spoke a little bit about analyzing certain plants maybe at good prices in the Mato Grosso do Sul close to your clusters. So if any opportunities are arising, do you think that you can consider maybe something happen here in the second half. So those are my questions.

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

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Okay. Thank you, João, for your question. I am going to ask Marcelo Sanchez to answer the question regarding our view on the ethanol and what we've been doing. Marcelo, please?

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Walter Marcelo Sanchez, Adecoagro S.A. - Co-Founder, Chief Commercial Officer and Director [10]

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Yes. Thank you, João. Good morning. We have been selling our ethanol production and capturing very good prices in the first portion of the second quarter. And that's the reason why we are reflecting above average prices in the ethanol. Regarding the question on our -- the impact on the fiscal themes and how that's going to be affecting prices going forward, we think that fiscal themes have to improve based on our competitiveness at the time, of course, and consequently has generated a positive impact in demand as well. And considering our current expectation of the autocycle demand that is growing 2%, Brazilian ethanol production, we are positive that prices will continue attractive to the crop, and we expect a very good significant increment in prices by the fourth quarter and the remaining portion of this third quarter.

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

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Is it okay, João? Then I will address the second part of your question on the M&A strategy on our Sugar, Ethanol and Energy business. We have no real news on regards the M&A strategy. We are very happy on how we are advancing with our own growth in the cluster. So that's working pretty well as we've mentioned in the call. And we have no now real news on the other subjects. We are -- I think, we have nothing to comment other than we'll continue looking at things.

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Operator [12]

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Our next question comes from Thiago Duarte of BTG.

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Thiago Callegari L. Duarte, Banco BTG Pactual S.A., Research Division - Analyst [13]

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A quick question on the sugar and ethanol side. There were some news in the last couple of months regarding potential regarding frost that, I think, according to the news hit the state of Mato Grosso do Sul. So it would be nice to have through you guys an update on how that potentially affected the sugarcane plantations of the company. And of course, when you think of the acceleration of the crushing pace in the second half of the year, if you think you could reach the levels that you did in terms of productivity and TRS that you did last year, it would be nice to get an update on that.

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO and Director [14]

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Okay. Thiago, thank you for your question. We have Renato in the middle. So I am going to ask Renato Pereira to address your question regarding the frost and productivity levels. So Renato, please.

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Renato Junqueira Santos Pereira, Adecoagro S.A. - Director of Sugar and Ethanol Operations [15]

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Hi, Thiago. Thank you for your question. We had a low intensive frost in July. This will have a small impact in 2017 because we were able to harvest and crush the affected sugarcane just after the frost as the weather was very favorable for crushing. The impact will also be minimal in 2018 as we're having a good condition to the sugarcane growth. In relation to your second question, I think the comparison, which is the 2016 (inaudible) were above average due to the high level of rains in the last quarter of '16 and first quarter of '17. In addition, the weather in the last quarter of '16 and first quarter of '17 was driving the average, negatively affecting sugarcane yields in this quarter. Considering the high volumes of rain we have in the second quarter of '17, we expect the sugarcane will improve for the rest of the year. It's also important to highlight that our current (inaudible) is too much better than the average of same results and that we are still planning to crush 11.2 million tons of sugarcane.

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Operator [16]

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(Operator Instructions) Our next question is from Javier Martinez of Morgan Stanley.

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Javier Martinez de Olcoz Cerdan, Morgan Stanley, Research Division - MD [17]

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I would like to take advantage as Marcelo is there to ask a technical question. I was a little bit surprised with the high level of hedging prices that you have on corn, and I was wondering if that's because on top of the hedge, you have also some trading gains or maybe because of the basis last year in Brazil, Argentina because the prices went up so much in Brazil, so I was curious to know how are you able to hedge prices so high for corn.

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Marcelo Wayland Barbosa Vieira, Adecoagro S.A. - Director [18]

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The reason why we reached this 460 cents per bushel in the corn, you are correct in your analysis. We had locked premium basis, that portion is adding value into when you compare with achievable prices, that's the reason and the total amount of maybe 20,000 tons out of the 38,000 that shows in the report. And the rest of it is coming out from sales in the domestic market that also have been reflecting higher price.

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Operator [19]

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

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Mariano Bosch, Adecoagro S.A. - Co-Founder, CEO and Director [20]

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Thank you. The first half of the year has shown good results in all our businesses. Now we have a challenging semester ahead of us. We will concentrate our efforts to keep our costs low and to maximize our returns. Our employees, contractors and stakeholders are ready and committed to do the job. So look forward to seeing you in our upcoming IR event. Thank you for joining the call.

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Operator [21]

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