Adecoagro SA (AGRO) 2013 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's first quarter 2013 results conference call. Today with us, we have Mr. Mariano Bosch, CEO, Mr. Carlos Boero Hughes, CFO, and Mr. Hernan Walker, Investor Relations Manager.

We would like to inform you that this event is being recorded in all participants will be in listen only mode it 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 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 will turn the conference over to Mr. Mariano Bosch, CEO. Mr. Bosch, you may begin your conference.

Good morning everyone and thank you for joining our earnings call for the first quarter of 2013. We are very happy to announce that on April 26 we inaugurated Ivinhema mill. The opening ceremony was held with the presence of representatives of government authorities and the majority of our stakeholders which support constituted a very important element of the success.

Ivinhema and Angelica mills confirm (inaudible) that is expected to reach a minimum capacity of 10.3 million tons which we believe will become one of the most efficient and low cost producers of sugar, ethanol, and electricity in Brazil and generate attractive returns on invested capital.

In Angelica and UMA mills, we began the crushing season earlier than usual in order to benefit from attractive ethanol prices. Our commercial team has also done hedging almost our entire sugar production at around $0.20 per pound. We are prepared for an excellent year for our sugar, ethanol, and energy business.

Moving on to our farming business, we are well advanced with the harvest of our crops. As you know, our business is naturally exposed to weather risks and we have gone through some tough weather conditions this harvest year. Despite the lower production yields for the soybean crop, we expect to have better results for our rice and corn crops which were not so affected by the summer drought. This is a clear example of how our product diversification allows us to mitigate risks associated to our business.

Finally, and continuing with our focus on return on invested capital, at the beginning of May, we sold our coffee farms in Brazil at the premium to the Cushman & Wakefield farm appraisal.

Now Charlie will explain the results of the quarter. Charlie, please go ahead.

Good morning, everyone. I would like to walk you through a few slides that reflect the lean operation and financial highlights of the quarter.

2013 has been a challenging year for our crop business in terms of weather. The main productive regions of Argentina have been impacted by an abnormal lack of rains. The charts on page three show the rain's distribution in the Humid Pampas and the Northwest regions of Argentina compared it the historical average.

As you may see on the chart to the left, the Humid Pampas or Argentine corn-belt was impacted by a severe drought during January and until mid-February. Rains during this period are critical for the soybean crop since the plant undergoes the pod-forming and the grain filling phase at which point water requirements peak. Therefore the dry weather caused irreversible damage on the crop. Soybean second crop was also impacted in this region since the crop began its initial growth with very low humidity.

The charts to the right of the page you may see that the Northwest region also suffered from drought which began in January and was extended until April. As a result, soybean first and second crops were negatively affected.

In the case of corn, which is traditionally planted in September and the growth and critical development during December, the impact on yields was less significant since rain levels during these months were good as you may see in the chart.

As you may see on page three of the presentation, the harvest of our crops is well advanced. As of the end of April, the harvest of wheat and sunflower was fully complete and rice was practically completed.

Flour yields were in line with the previous crop season. Wheat yields were 30% below the previous year and below our expectations. This is explained by two main reasons. First, yields during the previous crop year had been exceptionally good due to very good weather. And second, in the current season, above average humidity conditions until the outbreak of a grain disease known as Fusarium across Argentina and Uruguay.

In the case of rice, harvested yields were 5.7 tons per hectare almost 5% higher than the previous harvest year. This yield increase is primarily a result of better rain distribution and temperatures for the crop. We believe there is still significant upside potential for our rice yields. We expect to rice yields to gradually increase over the next two years as we continue with the transformation and zero leveling process of our farms.

Regarding soybean first crop as of the end of April, we harvested 48% of the crop. The harvest began in our highest quality farms and as a result, partial yields remain higher than last year. We expect final yields to be slightly below the previous harvest year as a result of the drought experienced during January and mid February of 2013.

Moving to the right, you may see that 20% of the second soybean crop was harvested as of the end of April. We do not consider the yields observed over this small harvested area of a represented example for the entire crop. Due to the drought mentioned in the previous slide, the lack of moisture prevented the normal development of the crop.

Accordingly, we expect final yields to be slightly below the previous harvest year. Lastly, 28% of the corn area has been harvested. Early corn planted in September grew under good conditions since the flowering period of this crop is in mid-December where rainfall and soil humidity were adequate.

Speaking to the diversified crop risk and water requirements approximately one-third of our corn was planted it during the end of November and the beginning of December 2012. This late planted corn area had good humidity conditions during their initial growth stage however plant flowering took place between early and mid-February and was negatively impacted by the lack of rain. In aggregate, we expect final yields approximately 15% above the previous harvest year.

Let's move to slide four to analyze the financial performance of the farming business. Specifically in the crops segment, the decreasing sales was primarily driven by lower physical sales volumes of wheat, as a result of a lower planted area and lower yields as explained on the previous slide. On the other hand, rice sales increased by 36% as a result of the combination of two factors.

First, a 5% increase in yields and second, an 11.9% increase in planted area compared to the previous harvest year. On a consolidated basis, total farming sales in the first quarter of 2013 reached $63 million in line with those of the first quarter 2012.

Moving to the bottom chart of the slide, we may see that despite that the decrease in sales, adjusted EBITDA for our crops segment increased from $12 million in the first quarter of 2012 to $14.7 million in the first quarter of 2013.

The improved performance is plainly explained by a $6.8 million increase in the result generated by the mark to market of our hedge positions which was partially offset by lower gains from changes in fair value, primarily as a result of the 8.8% decrease in planted area and lower soybean yields and prices expected.

Moving to the right, you may notice that the adjusted EBITDA of our rice segment increased for $0.8 million in the first quarter of 2012 to a $4.6 million in the first quarter of 2013. This improvement is driven by the expansion in candid area and higher rice yields. As a result, consolidated adjusted EBITDA for our farming business reached $18.8 million, 48% higher year over year.

Let's move to page five. During early May, we sold the Mimoso and Lagoa de Oeste Farms located in Western Bahia, Brazil. The farms have a total of 3,834 hectares of which 904 hectares are planted with coffee trees. Adecoagro will collect a total of $20.8 million for Mimoso and Lagoa including the coffee plantation. This selling price represents a 7% premium to the combination of the Cushman & Wakefield independent appraisal dated September 2012 plus the fair value of the coffee plantations in our balance sheet.

In addition, the buyer will also operate 728 hectares of coffee on our Rio de Janeiro farm and during an eight year period for which Adecoagro will collect a total of $3.8 million. This transaction evidences Adecoagro's focus on return of invested capital.

Now let's move on to the sugar, ethanol, and energy business on slide six. The first three months of the year are commonly known as the in harvest season. During the summer months, due to favorable weather conditions, sugarcane plant growth is a stimulated and less energy is stored in the form sugar. As a result, mills suspend their crushing activities while the equipment undergoes maintenance in preparation for the upcoming harvest year.

During the first quarter, mills also focused on the renewal and expansion of their sugarcane plantations. During the first quarter of 2013, we planted a total of 6,371 hectares of sugarcane slightly below the hectares planted in the first quarter of 2012. Of this total area, 2.400 hectares consisted of new planted areas to supply sugarcane to the Ivinhema mill, which began its crushing activities in April 2013.

Additionally, 3.900 hectares consisted of sugarcane replanting to replace older sugarcane with new high-yielding sugarcane to maintain the productivity of our plantation. As of March 31st, 2013, our sugarcane plantation consisted of 87.9 thousand hectares representing a 24% growth year-over-year.

On page seven 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 sales of sugar and ethanol inventories. The expenses incurred in sugarcane maintenance and preparation for the next harvest season hedging results and overhead expenses.

As shown in the upper left chart, net sales for the first quarter of 2013 were in line with the same period of 2012. Nevertheless, gross profit increased from $8.7 million to $16.6 million. The improvement in gross profit is primarily the result of a lower cost for the sugarcane be used as raw material to produce a sugar and ethanol inventories sold June in the first quarter of 2013 compared to the first quarter of 2012.

The cost of sugarcane transferred to the meaningful processing is directly related to the price of sugar. Since sugar prices during 2011 were considerably higher than in 2012, inventories as sold in the first quarter of 2013 were produced with lower-cost sugarcane compared to inventories sold in the first quarter of 2012. In addition, our operating margins are were enhanced by the mark to market of our sugar hedge positions. We have hedge 247,000 tons of sugar at an average price of $0.208 per pound of sugar number 11 equivalent.

Since current prices are below $0.18 per pound our hedge generated a $9.6 million gain in the first quarter of 2013 compared to a $5.3 million loss in the first quarter of 2012. Overall, adjusted EBITDA in the first quarter of 2013 was $15 million, $19.7 million higher than the first quarter of 2012.

Page eight shows the evolution of adecoagro's consolidated financial performance during the last three years. Consolidated adjusted EBITDA for the Company increased from $1.8 million in the first quarter of $2012 to $29 million in the first quarter of 2013. Adjusted EBITDA margin in the same period has increased from 1% to 28%. We expect our earnings and return on invested capital to continue increasing at our [bestest] continue to achieve operational and cost efficiencies and our 10 million ton sugarcane processing in Mato Grosso do Sul is consolidated.

Moving to page nine, our debt of standing as March 31 of 2013 has increased by $54 million since the previous quarter for a total of $593 million. Long-term debt increased by $38 million driven by the capital expenditures related to the construction of the Ivinhema Mill. Short-term debt increased by $16 million. The first quarter of the year is usually the peak of our working capital cycle since only a small portion of our crops are harvested and sold and our sugar, ethanol, and energy business is getting ready to begin the new season.

As we accelerate the harvest and selling pacer during the second and third quarters, that standing will be reduced. I would like to highlight that our debt structure is 66% in the long term. Our cash balance has decreased for the same reasons from $218 million in the last quarter to $210 million as of March 2013. In aggregate, current net debt stands at $383 million.

Let's move to the last slide. On April 26, 2013, Adecoagro celebrated the integration of the Ivinhema Mill located in Mato Grosso do Sul, Brazil. Ivinhema is a milestone event in our consolidation as a leader producer of food and renewable energy. The construction of the first phase of Ivinhema was completed on schedule and on budget. The Ivinhema mill currently has 2 million tons of crushing capacity and will expand into 4 million tons in 2013 and 6.3 million tons in 2017.

Together with the Angelica Mill our first Greenfield completed in 2010 it will form a 10.3 million ton cluster surrounded by over 120,000 hectares of sugarcane plantations which we believe will allow us to become one of the most efficient and low cost producers of sugar, ethanol, and electricity in Brazil.

Ivinhema has successfully commenced the 2013 and '14 sugarcane harvest and it is expected to crush approximately 1.5 million tons of sugarcane producing sugar, ethanol, and electricity for the local and international markets.

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

Thank you, sir. The floor is now open for questions. (Operator Instructions)

The first question we have comes from Fernando Ferreira of Bank of America/Merrill Lynch. Please go ahead.

Thank you. Good morning everyone. I had just a strategic question. We are still seeing in the stock traded at meaningful discount to its NAV, so I just wanted to ask you if this strategy could be to accelerate farming sales in Argentina this year or not if it's part of your plans?

Hello Fernando. It's Mariano. Thank you for joining the call. Yes, Fernando, our strategy is to sell farms in Argentina and that has always been the strategy of the Company as you've seen last year. At last year we sold more than the previous one and this year we are in line to continue executing the same strategy and we think this should help. And again, always this is in line with our return on invested, on invested capital policies so all the farms we are selling our because we think we can generate more attractive returns in new farms or in new businesses.

Okay, thanks Mariano. And how easy or how difficult has it been to sell farms in Argentina lately?

As we always mentioned, selling farms is and not super liquid of market. We all know this market is not super liquid, but as I previously mentioned, last year we sold more than the previous one and we increased sales by double and we feel confident that we will continue with this is same strategy this year in Argentina.

Perfect. Thanks Mariano.

And next we have Rodrigo Mugaburu of Morgan Stanley.

Hi, Mariano. Hi, Charlie. I actually have two questions. One, can you give some guidance what you were going to do with the proceeds from the coffee farm sale that you announced in the release? And the second, if you can give some idea of how much of the tax cut of the of BRL120 have you actually seen pass-through as an increase for the ethanol price at the mill? Thanks.

This is Mariano, regarding your first question, and the decision of the sale of the coffee farms is in line with our return on invested capital policy so we are going to invest this proceeds into new businesses that are going to yield in line with our expected hurdle rates and not what the coffee farms were yielding at this level of prices.

And regarding your second question on the ethanol, I will ask Marcelo Sanchez to take that question. So Marcelo, please.

Hi Rodrigo. The positive aspect on the measure is a given that we are going to be achieving part of those BRL120 per cubic meters it's a little bit early today to say how much will be achieved by the means but of course, the positive, a maximum positive aspect would be the BRL120 per cubic meter. But besides that we strongly believe that that will be improving the parity of the ethanol at the pump and that of course will be bringing an increasing consumption in the ethanol. And then you can have a double positive effect one coming from the price and the other coming from volume.

Great. Thanks Mariano and Marcelo.

(Operator Instructions)

Our next question comes from Federico Rey of Raymond James. Please go ahead.

Yes, hi, good morning, everybody. Thank you for the call. I have a question regarding the sale of Lagoa and Mimoso Farms. You mentioned that the expected EBITDA, adjusted EBITDA coming from this at least $8 million. I would like to know if you have any estimates regarding some pretax or asset tax gains and also if you expect a reversal of hedging gains or hedging losses that are not included in the amount that you are mentioning. Thanks.

Hi Frederico. The EBITDA generated by the sale of the coffee is $8 million at that we were mentioning and the tax implications of that is only $0.5 million. So that's the total cash -- the total tax implication on this sale and we don't expect any reversal through the hedging that you are asking about.

Okay. Thank you.

The next question we have comes from Thiago Duarte of BTG.

Hi. Good morning, everybody. A couple of questions on the sugar and ethanol business, first, why is it that you were not expecting to crush all of the 2 million tons in the new Ivinhema mill, you mentioned in the release that you expect to be crushing 1.5 million tons this year? So I was just wondering if it's related with the weather or availability of sugarcane for some other reason.

In the second question is a more generic one. You guys are one of the new company is investing in Greenfield and Brownfield capacity in the industry in Brazil. So I think the right question here would be what would make you change your mind or what variable would make you not go on no with further investments in Greenfield projects and in this case, the extension of the Ivinhema Mill? Thank you very much.

Hi, Thiago. I am going to ask Marcelo Vieira, our sugar and ethanol director to take the first part of your question. I will take the second one. So Marcelo, please.

Yes the mill -- Ivinhema Mill this year will be 1.5 million tons and that is according to plan. You have to have continuous growth and development of the plantation so it has been planned from the start to have 1.5 million rounds of the first season. That's also because it's the first season and we are still commissioning the equipment and adjusting the team. And next year we will be at full capacity for the first place, 2 million, and we will keep growing for the second phase which is already planned to reach 4 million tons in three years.

Thiago, regarding your question on why are we doing the green fields and what's the reason behind our Greenfield projects on the Ivinhema Mill that we just now I directed. It is important to understand that the Ivinhema Mill is part of the growth of the cluster. So this is marginal growth and marginal growth in an area that we secured aware we have a very low leases. We have availability of farm to plant the sugarcane and with excellent conditions to grow the sugarcane without very little competition with other different crops.

So that's why this specific growth is where we are seeing a very attractive returns on investment when we analyze of the return on investment and the returns that we are getting there through this marginal investment or marginal growth in order to complete the cluster we are getting IRR as well above what we are seeing in the market.

It could be a totally different story if we need to start a Greenfield in a new area where you have to develop from scratch everything. As so that is why we are growing here in this cluster. We are completing Ivinhema and we are very comfortable with the returns we are achieving with this marginal growth of the cluster that we are developing.

(Operator Instructions)

Next we have Giovana Araujo of Itau BBA. Please go ahead.

Good morning. My first question is about sugar and ethanol. I would like to know what is going to be our strategy for ethanol commercialization this year. If you intend to hold inventory to sell at a better moment avoiding the peak of the crop and what amount do you actually export and what is the (inaudible) of ethanol exports versus domestic allocation? That will be my first question.

Good morning Giovana. I'm going to ask Marcelo Sanchez, our commercial director to take your question.

Marcelo?

Thank you very much Giovana. We accelerated our sales at the very beginning of the crop and now we are delaying them for the second half of May but this will not really have an impact in our commercialization strategy. We are aware that there has been an opening in the export window and we are really watching closely that alternative and that has always been our strategy to maintain the flexibility of arbitrage, the best chance for getting the best return for the ethanol in our mills.

My second question is about soybean yields. I would like to know what levels of yields you will stack by the end of the crop in Argentina, the second crop.

We have the soybean yields in general Argentina is we are expecting 48 million tons in total. That is roughly 3 million tons less than the USDA is reporting period Argentina had a good first soybean crop harvest, 50% already harvested at 3.4 tons per hectare. It is really early to know what that final second crop soybean output will be, but as I told you we are working with 48 million ton production.

Okay, but how about adecoagro's yields? What level do you expect by the end of the crop?

As we mentioned, Giovana, we are expecting slightly below 2012 so the previous year and average for soybean first crop and second crop probably the first crop is a very slightly below in the second crop is a little bit more than slightly below.

Okay, thank you.

The next question that we have comes from [Viceno Petrinostro] of Credit Suisse.

Good morning, everyone. My question is on sugar price. What's your view on your sugar price for this season since the sugar price has been under pressure in the last six months due to the expectation of strong harvest season in Brazil? So in your view, are we close to the bottom of the sugar price or do you expect prices to continue to be under pressure in the next month?

I'm going to ask Marcelo Sanchez to take the question.

As you might have been following our performance in the hedging strategy, we have been foreseeing developing prices within the last six or seven months and that is the reason we are today at well volume hedge from our current harvest. We do have our 82% of the projected harvest already hedged at a level of [$20.82]. It's really early to say what the development will be for next year's price. You are witnessing in the charts for next year you have [$18.32]. That is a positive a price compared to today priced at [$16.90]. As I said, there are many things to evolve until we see the next harvest price.

Okay, thank you.

It appears that we have no further questions at this time. We will conclude the question-and-answer session. At this time, I would like to turn the floor to Mr. Bosch for any closing remarks.

Sir?

Thank you. This is a year full of challenges in all of our businesses and we have excellent plans to execute our strategy while at the same time provide attractive the results for our shareholders. The company today is in a very good condition and all of our operational teams are highly motivated to deliver during this campaign.

Finally, I would like to invite you to participate in our IR program and thank you all for joining our call.

And we thank you, sir and the rest of the management for your time. We thank you all for attending. This does conclude today's presentation. At this time, you may disconnect your lines. Thank you, and have a great day, everyone.