Adecoagro SA (AGRO) 2012 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for waiting. At this time we would like to welcome everyone to Adecoagro first quarter 2012 results conference call. Today with us we have Mr. Mariano Bosch, CEO, Mr. Charlie Boero Hughes, CFO, and Mr. Herman Walker, Investor Relations Manager and the senior management team. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the Company's presentation. After the Company's remarks are completed there will be a question-and-answer session. At that time further instructions will be given.

(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 the 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.

Thank you for the introduction. Good morning, everyone. You are all welcome. As you know our business in its nature is exposed to weather and we have gone through tough weather conditions during this harvest season.

We have measures such as different timing for seeing our growth, diversification of products and geography, and know this technology that contributes to mediate this climatic risk that we are exposed to. During this present quarter we are reflecting the drought during the end of February and March that affected the Northwestern region of Argentina and that our corn and soybean production.

Also we are reflecting the unusual low temperatures experienced in the period affecting negatively our rice yields, which were not offset yet by an increase in price. On the sugar and ethanol business we have increased the plant [of area] in line with our plant and that is meeting and starting our [meeting] season at Angelica and UMA with those conditions. The construction of Ivinhema is advancing very well and with this brief introduction I will now ask Charlie Boero to walk us through the main highlights of Adecoagro's first quarter numbers. Charlie please?

Thank you, Mariano. Good morning and thank you for joining Adecoagro's earnings call for the first quarter of 2012. I would like to walk through a few slides that reflect the main operation and financial highlights of the quarter.

As you may see on page two of the presentation the harvest of our crops is well advanced. As of the end of the first quarter the harvest of wheat and sunflower was fully complete and rice was about to be completed.

Yields for wheat were 21% below the previous year, mainly since last year weather conditions had been very good for wheat production. In the case of sunflower yields were slightly below the previous crop season. In the case of the rice harvested yields reached 5.6 tons per hectare, almost 11% lower than the previous harvest year. This year's reduction is a result of low temperatures during the growth season. We can see this in detail in if we move to page three.

As you can see on the bottom chart of the page between October and December, which is the critical growth period for rice, there were 62 days with average temperatures that were 2.6 degrees Celsius lower than the average historic temperatures. These lower temperatures have negatively impacted the crop development throughout Argentina. According to local market estimates yields on a national level would be ten to 15% lower than the last year as a result of these temperatures.

Going back to page two, as you may see in the bottom of the page the harvest of soybean first crop, soybean second crop and corn was in its initial stages as of March the 31st. As a result harvested area yields are not represented above our expectations for the full year area.

In the case of soybeans we expect final yields to be approximately 5% below the previous last year as a result of the drought experienced during November and December of 2011 in the Humid Pampas and the recent drought suffered in the Northwest of Argentina during February and March. In the case of soybean second crop we expect final yields to be slightly lower than last year since the lack of moisture in the soil delayed the planting of the crop. Finally, in the case of corn we expect average yields to be approximately 10% than the previous harvest year, but 20% below our initial estimates, also as a result of the drought in the Humid Pampas and the Northwest.

On the top left of page three you may see a chart that analyzes the drought we experienced in the Argentine Humid Pampas, the country's corn belt region. The rains during November and December were significantly lower than the historic average. December rains are critical in this region since the corn planted in September and the growth plant flowering, a growth phase in which the plants' water requirement speak.

Therefore the dry weather cost irreversible damage on early corn planted area. The drought also delayed the planting of our soybean second crop which could not be planted at the proper time due to lack of moistures in the soil. This delay in planting is also expected to reduce yields due to the shortening of the crops' life cycle. In addition, you may see the drought experienced in the Northwest farms in Argentina during February and March. This lack of rain has mainly affected our corn yields in the region and to a lesser extent soybeans.

We believe that the diverse geographic locations of our farms and our product diversification, together with our sustainable production model focused on (inaudible), has partially mitigated the negative impacts of the drought. The impact on corn production is a good example. Argentine corn production is expected to [fall] over 30% from initial production estimates of 29 million tons to current estimates of 19 million to 20 million tons, whereas the impact on our production is estimated at 20%.

Moving on to slide four you may see the financial performance of the farming business. Our sales have increased 27%, driven mainly by our growth in planted area and in production. Our total farm in planted area has grown by 20.9%, or 40,000 hectares.

Our adjusted EBITDA has dropped 39% from $20.8 million in the first quarter of 2011 to $12.7 million in the first quarter of 2012. This is basically a result of the water impact explained in the previous slide, which negatively affected our crops and rice business segments. In the case of rise the financial performance was also impacted by lower selling prices year-over-year.

Now let's move on the sugar, ethanol and energy business on slide five. The first three months of the year are commonly known as the inter-harvest season. During these summer months due to very favorable growth conditions sugar cane plant growth it's [in related] and less energy is stored in the form of sugar.

As a result mills suspend their crushing activities while equipment and the [growth] maintenance in preparation for the upcoming harvest year. In the first quarter this also focused on renewal and expansion of their sugarcane plantations.

During the first quarter of 2012 we planted a total of 6,470 hectares of sugarcane, more than double the area planted in the first quarter of 2011. Of this total area 5,697 hectares consisted of new planted areas to supply sugarcane to the Ivinhema mill, which is expected to begin its crushing activities in 2013.

Additionally, 773 hectares consisted of sugarcane replanting to replace all the sugarcane with new high yielding sugarcane and maintaining the productivity of our plantations. The increase in planted area year-over-year was accomplished as a result of favorable weather, a larger agricultural structure and higher planting efficiencies. As of March 31, 2012 our sugarcane plantations consisted of 71,005 hectares, representing a 25% growth year-over-year.

In page six we can see the financial performance of our sugar, ethanol and energy business. As a result of the inter-harvest season adjusted EBITDA in the first quarter only reflects the sale of sugar and ethanol inventories, the expenses incurred in the sugar maintenance and preparation for the next harvest season, hedging results and overhead expenses among others.

Our sales have grown five times from $8.9 million to $45.8 million as a result of higher inventory sales during the first quarter of 2012 to comply with the delivery of sugar and ethanol forward sales contracts. As a result our operating profit has increased from $2.2 million in the first quarter of 2011 to $10.8 million in the first quarter of 2012. In addition, our gross margin profit has grown from negative 6.5% to positive 7.1% on the account of lower inventory production costs and higher prices.

Our operating margins were negatively impacted by the mark-to-market of our sugar and ethanol derivative hedge position. As a result of the increase in sugar prices during the quarter we are posting a $5.6 million unrealized loss in other operating income. Overall adjusted EBITDA in the first quarter of 2012 is negative $4.7 million compared to a loss of $5.4 million in the first quarter of 2011.

Page seven shows the evolution of Adecoagro's consolidated financial performance during the last five years. Regardless of the low first quarter as a result of climatic issues, which we do not control, we expect our sales and adjusted EBITDA to continue growing this year and the upcoming years, driven by the transformation and acquisition of farmland, the construction of the Ivinhema mill consolidating our cluster in Mato Grosso do Sul and the increase in operational efficiency in each business.

Finally, on page eight our net debt as of March 31, 2012 has increased to $124 million, driven by a $45 million increase in total debt and $48 million of less cash to finance our capital expenditures. Thank you very much for your time. We are now open to questions.

Thank you. The floor is now open for questions.

(Operator Instructions)

Our first question will come from Rodrigo Mugaburu of Morgan Stanley. Please go ahead.

Hi. Thank you. Good morning, Mariano, Charlie. I have a couple of questions. The first one is it seems like farms in Argentina are going to reduce the plant area for corn and wheat for next year. Are you planning to some changes on your crop plan for the '12, '13 in light of that?

And the second question is related to taxes on land. It's been on the news in Argentina there might be some reform there. Can you give us an idea of what could be the impact on Adecoagro if that happens? Thank you.

Hi, Rodrigo. Thank you for your questions. Number one, we are always the amount of soybeans, the corn and wheat that we are planting, number one is that we are always taking into account the sustained (inaudible) model, so we do have some flexibility to move, but in order to look this long-term view that we have on our soils we cannot change 50% of the model.

So we are going to do more soybeans than corn, an example, because we are having better margins, but on the long run these margins will change if you are always doing soybeans. That's why we are doing some changes in line what with what they are and in general is doing, but you cannot do 100% of that. That is the answer of the first question.

On the second question, the taxes on land in Argentina, we are estimating the exact impact if this is approved. Roughly we are talking about $500,000 to $700,000, will depend on how this is really approved.

Great. Thank you very much, Mariano.

Our next question comes from Giovana Araujo, Itau BBA. Please go ahead.

Hi. Good morning, everyone. My first question is about soybean and corn yield. Can you give us an update about your expectations about yields for those crops for the amount that yet has to be harvested? So that will be my first question.

Is that for us or for Argentina in general?

For you, for you, sorry.

Okay. We are thinking. We haven't finished our harvests. We are in the middle, but we are estimating to have 10% below last year in corn --

Okay.

-- and between 5% below last year in soybeans.

Okay. And my first question it's about sugar cane crushing in Brazil and of course of Adecoagro. What are the prospects for your crushing this year and how much crushing you potentially could add we think in next year? Thank you.

Giovana, as you know we don't give guidance, but what we have been saying is that we should have in Adecoagro between 85% to 90% of our crushing capacity, still planting additional cane. And for next year in Ivinhema we are planting and we are advancing pretty well in our planting, but we cannot give guidance on how much we are going to be meeting in Ivinhema next year.

Okay, okay. Thank you.

(Operator Instructions)

Your next question comes from Pedro Richards of Raymond James. Please go ahead.

Thanks. Hi, Mariano, Charlie. Thanks for the call. My first question is related to the land transformation business if you could share with us more details on this business line, perhaps how many hectares you are targeting to transform this year, how many new productive hectares you are planning to incorporate into the upcoming 2012/'13 harvest, and what should we expect to see over the next months in terms of farmland transactions for Adecoagro. Thanks

Okay. Hi, Pedro. How are you? On regard to your question, the last part of your question where what are we planning to do next month or next quarter, we haven't given guidance because we don't give guidance there, but on the first part we still have a (inaudible) of hectares to be transformed that we've been talking about. And we expect this year to put into production around 50% of that total amount of hectares.

Okay. And thanks. And I had a follow-up question regarding the rice crop. Charlie mentioned in his slide number four a bit of that. I just wanted to understand which were the main drivers for the result for the poor results in rice this quarter. There was an 11% decline in yield, but I think prices were only 3% down. I don't know if there was like higher operating cost, or just wanted to understand the result of price over the first quarter of this year. Thanks.

Okay. Number one, it's the whole Argentina yield wide and south of Brazil production. The estimates are between 12% to 17% down in general because of climate. And that was relatively a surprise for all this total production. And that was mainly explained by these low temperatures that Charlie was talking about. So those are neutral, low temperatures during November, December, beginning of January affected this yield potential. So if are they one affecting that is the higher impact on the total production on the total margin.

Okay.

And in terms of prices you see only 3% decline, but if you think on net prices that is even lower because we sold to new regions in containers where you get the same final price, but the net price is lower because you have a regional cost comparing containers again, the bulk. And that's why prices are at why lower than what it is in the report.

Okay, very clear. Thanks a lot.

(Operator Instructions)

Having no further questions this concludes the question-and-answer section. At this time I would like to turn the floor back to Mr. Bosch for any closing remarks.

Okay. Thank you. Before completing the call I would like to make the following remarks. In the sugar and ethanol business we just had the milling season and we will continue developing our unique plant in Mato Grosso do Sul and obtain maximum efficiencies at UMA and Angelica.

In our farming and land transformation business we continue our transformation and development of new areas, and while at the same time seek for opportunities to capture the maximum return on investment. Having said this, we are aware of the current financial and economic risk prices that the world is going through which still needs to [hit]. And therefore we have intensified all our efforts to increase our efficiencies, look deeply in our costs to confront the challenges of this potential difficult scenario. So finally I would like to invite you again to participate on our IR program and look forward to seeing you during the year. Thank you very much for joining us today.

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