Adecoagro SA (AGRO) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we'd like to welcome everyone to Adecoagro 2Q '13 Results Conference Call. Today with us is 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 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 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'd like to 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 call. I would like to go through some of the main highlights of the quarter. I assure you that our business had some great progress compared to last year.

[Two or three pressing enveloped] the volumes have increased above 80%, mainly driven by both -- one, higher [desidual] capacity at our Adecoagro mills, and two, the ramp up of the new Ivinhema mill. We are happy with the start up of this new mill that we completed last year.

Now we are focusing on having an efficient harvest, and keep our mills running at full capacity when we enter the peak of the harvest season. Our agricultural and method of operations have improved significantly.

Lastly, we (inaudible) reviewing processes to enhance our operation and results year-after-year. We are in the final recess. We have completed the [tutaton] plants that didn't have here. We give below our expectations, mainly as a result of weather conditions. Soybean has been the most severely affected crop, reaching an average yield lower than the previous harvest year. Weather was less sever with the corn and rice crops, which had better years than last year.

We are now fully focused in the new harvest. The planting of wheat is well advanced, and we are prepared to start seeding soybean, corn, rice, and the rest of the crops during the next semester. Our operation and (inaudible) things have already been assembled and are in great shape to start working on the new harvest system that we established.

Our (inaudible) business had some important [tretise] during this quarter. We completely (inaudible) of our milk processing activity, La Lacteo. We also shut down our grazing dairies and (inaudible). We are proud to announce that 100% of our milking cows are under the free-stall [processing] system. With these changes, we are confident that we will achieve our expected returns on the dairy business.

We are adding [milento homencho] business. We continue with our strategy of selling a portion of our transformed land every year in order to allocate this capital in better return alternatives.

In the previous quarter, we announced the sale of our (inaudible) farm at a 7% premium for the (inaudible) operation. In the second quarter, we completed the sale of Santa Regina farm in Argentina at a 16% premium to the Cushman and Wakefield appraisal.

Also, I would like to highlight that we have reduced our corporate expenses, and have accepted our (inaudible) us stockholders in improving (inaudible) for a checklist. I would ask Charlie to roll over the performance of the quarter. Charlie, please, go ahead.

Good morning, everyone. I would like to walk you through a few slides that reflect the main operational and financial highlights of the quarter. As you may see on slide 2, the 2012 and '13 harvest is practically complete.

As of June 30, 2013, 201 -- call it 8,000 hectares, or 93% of total area has been harvested. However, as of the date of this call, 98% of the area has been harvested, with only a hectares of late corn remaining. As [planted faded] in the first quarter earnings release most of our crops have been affected by a lack of rainfall throughout the main productive regions in Argentina.

Soybean was the most damaged crop, both for the company and for farmers nationwide. Average yield were 10% and 15% lower compared to the previous harvest year. In the case of the corn crop, the main affect of the drought was less severe. Most of our corn was planted between September and November of 2012 with root soil moisture.

The crop's water requirements peak is between late December and early January, when the amount of water in the soil was adequate. Consequently, the corn crop only suffered stress in the last phase of its growth cycle. Although yields stand 9.3% higher than the previous harvest year, they are below our expectations.

In the case of rice, the average yield of our rice farms was 5.7 tons per hectare, 4.6% higher than the previous harvest yield, and still below the potential of our farms. We expect yields to continuing improving as we complete the transformation process, and the zero leavening of our rice farms.

On the left side of page 3, you may see a chart that shows the drought experienced in the Argentinean Pampas. The country's corn belt region during the 2012 and '13 harvest year, rainfall in January and February was significantly below the historical average. Rains from January throughout February in this region are critical to soybean, since the crop undergoes the pod-forming and grain filling phases in which the plant's water requirements peak. Therefore, the dry weather cost irreparable damage on the crop development. The drought also affected the development of soybean second crop and corn.

The chart on the right side of the page shows rainfalls for our farms located in the northwest of Argentina. [It's reading southward] from an even more extended drought period, which started in January and lasted until May 2013. Soybean first and second crop, and corn ears in this region were severely affected by the lack of water.

On slide 4, you will find the financial performance of the farming business. As you can see on the top right chart, the consolidated sales of our farming business for the first 6 months of 2013 were $173.3 million, 8% higher than the same period of the previous year. The main driver for this increase was the improvement in our rice and dairy segments.

Regarding rice, the combination of a higher planted area, better yields, and better prices, increased our sales by 32%. In the case of dairy, a larger cow herd combined with improved cow productivity and better milk prices caused sales to increase by 53% during the period.

Gross sales had a slight reduction compared to last year, mainly due to the lower soybean yields, and a slight decrease in planted area.

On the right side of the bottom chart, you may observe that the consolidated adjusted EBITDA of our farming segment increased 22% from $27.3 million in the first 6 months of 2012, to $33.2 million in the first 6 months of 2013. This growth was also driven by the performance of the rice and dairy segments, which increased adjusted EBITDA by $5.8 million, and $5.1 million, respectively from the period.

In the case of the dairy segment, adjusted EBITDA was positively impacted by the sale of La Lacteo, a small milk processing facility, which generated $2.9 million of adjusted EBITDA in the quarter. These results were partially offset by poor results in the coffee business, which was in fact sold during the second quarter of 2013.

Let's move to the land transformation business on page 5. As we reported in the fourth quarter of 2012 earnings release, on December 27, 2012 Adecoagro sold 51% of the outstanding shares of Santa Regina S.A., a company whose main underlying asset is the Santa Regina farm for a total of $13 million, equivalent to $7,000 per hectare. And that's in addition Adecoagro granted the buyer with a purchase option to acquire the remaining interest.

On July 14, 2013, the buyer decided to exercise the purchase option to acquire the remaining 49% of Santa Regina for a total price of $13.1 million, equivalent roughly $7,400 per hectare, and 16% above Cushman and Wakefield's independent appraisal dated September 2012.

According to our operating accounting rules, Adecoagro recognized a $10.5 million non-cash lien in the fourth quarter of 2012 while responding to the [furtheration] of the remaining 49% interest in Santa Regina S.A. With the exercise of the purchase option, Adecoagro was able to realize the gain recognized in the fourth quarter of 2012, and generate an additional $1.2 million of adjusted EBITDA.

On May 2, 2013, Adecoagro sold the Lagoa do Oeste and Mimoso farms located in Luis Eduardo Magalhaes, Bahia, Brazil. The farms have a total area of 3,834 hectares, of which 904 hectares are planted with coffee trees. The company will receive a total of $20.8 million for the farms, which reflects a 7% premium compared to the Cushman and Wakefield's independent appraisal dated September 2012.

As you may see on the bottom chart, Adecoagro has a strong and consistent track record of monetizing capital gains from its land transformation activities. Over the last 8 years, we have generated in aggregate $138 million of net capital gains.

On slide 6, you will find a chart that analyzes the growth of our sugar cane milling from the first 6 months of 2012 to that of 2013. As you may notice, sugar cane crushing increased by over 80% as a result of two main factors. First, a higher utilization of capacity at our Angelica and UMA mills, compared to the same period of the previous year.

And second, the crushing of our Ivinhema mill, which started commencing operations this year. The main driver for the improvement of financial performance was the increasing capacity utilization at our already existing mills.

Our sugar, ethanol, and energy operations have a high operational leverage, and we expect the return from invested capital of these investments to continue increasing as we reach full capacity utilization.

On the next slide, you may see how as a result of the increase in (inaudible) our sugar, ethanol, and energy increasing production increased by 65%, 89%, and 76%, respectively. Our mix of our high flexibility to produce both sugar or ethanol. Furthermore, we can produce hydrous or anhydrous ethanol. Therefore, our commercial team is constantly tracking price parity in order to maximize the production of the most profitable product.

In the first semester of 2013 maximized the production of ethanol. 61.3% of the TRS was directed toward ethanol production, which presented the highest margins during the period. Furthermore, as you may notice in the bottom left chart, 58% of the ethanol produced was anhydrous ethanol, which traded at a premium to hydrous ethanol. Lastly, moving to the bottom right chart, you may observe the strong increase in exported energy.

Co-generation is a strategic part of our business model. The margin and cost of production of burning the sugarcane (inaudible) is extremely low. Therefore, the profitability of co-gen is very attractive.

Let's turn to slide 8 to analyze the financial performance of the sugar, ethanol, and energy business. Net sales increased from $94.8 million in the first 6 months of 2012 to $117.7 million in the first 6 months of 2013. This growth is explained by the increasing both production and sales volumes, and offset by lower prices.

Moving to the chart on the right, you may see that both adjusted EBITDA and adjusted EBITDA margins had a considerable increase year-over-year. The combination of the increasing sales volumes, coupled with better capacity utilization, grew adjusted EBITDA and EBITDA margin to increase from $8.8 million to $14.7 million, and from 9.3% to 34.6%, respectively.

Let's move to slide 9. During the second quarter, our net income was negatively affected by a $27.2 million foreign exchange loss. This loss was generated by the impact of local currency depreciation on the dollar denominated debt, and by our local subsidiaries, and the mark-to-market of currency derivatives.

As you may see in the charts on the left side of the slide, the Brazilian real and the Argentine peso depreciated by 9.1% and 4.9% against the US dollar, respectively, during the second quarter of 2013. Now I would like to explain why these losses are generated and how they will be compensated in future quarters.

Now our Brazilian sugar and ethanol operations, revenues generated by sugar export sales are dollar denominated. Our sugar production costs are mainly denominated in Brazilian reals. In order to lock our margins, in addition to hedging sugar prices, we also hedge the future dollar inflows generated by sugar exports. Since we do not use hedge accounting, we must recognize the losses generated by these currency hedge instruments every quarter.

Additionally, these future sugar export flows are ours to finance our working capital with dollar denominated credit facilities. A payment of principal and interest of these flows are naturally hedged with a future sugar tariffs we will collect. Nevertheless, from an accounting point of view, we must revalue our dollar denominated debt every quarter, according to exchange rate fluctuations.

In the coming quarters, as we export our sugar production, we will collect dollar inflows at the spot real rate, compensating the losses recognized during the previous quarters.

Let's move to slide 10. On April 25, 2013, Ivinhema successfully began the 2013 and '14 sugarcane harvest with 2 million tons of nominal sugarcane crushing capacity, and the flexibility to produce both sugar and ethanol. [In the quarter] has begun the construction of the second stage of this greenfield project, which will expand nominal capacity to 4 million tons by early 2015.

Total capital expenditure, including the new facility, agriculture, machinery, and sugarcane plantations for the second phase is estimated at $222 million. This expansion will be fully financed by the 10-year loan granted by BNDES, the Brazilian Development Bank on December 27, 2012 at an average interest rate of 4.65% in reals.

Page 11 shows the evolution of our Adecoagro's financial performance during the last 3 years, and for the 6 month interim period. Consolidated adjusted EBITDA for the first 6 months of 2013 has more than doubled from $31.6 million in 2012, to $70.5 million in 2013. Adecoagro's adjusted EBITDA has been growing steadily since 2010 with a minor setback in 2012.

We expect this upward trend to continue over the next years as yields in our farming business are stabilized, and of the ramp up the sugar, ethanol, and energy sectors is consolidating around that to capture important synergies, economies of scale, and cost dilution.

Finally, on page 12, our net debt as of June 30, 2013 has increased to $402 million raising by $12.6 million increase in our standing debt, and a $6.4 million decrease in cash. Primarily, in order to finance our capital expenditures related to the construction of the Ivinhema mill.

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

Thank you. We will now begin the question and answer session. (Operator Instructions). The first question comes from Enrico Grimaldi of BTG Pactual. Please go ahead.

Hello, good afternoon, everyone. I have two questions. The first one relates to the possibility of you guys selling more assets going forward. I mean you sold La Lacteo this quarter, which seemed like a good transaction. But going forward, should we expect other transactions like this, and if so I mean, can you share with us what sort of non-core assets you have today in the company that could be divested? That would be my first question.

Hi, Enrico. This is Mariano. Yes, you should expect more sales of already developed farms. Those are the type of sales that you should expect on the next -- during the future. That's exactly the same strategy that we've been carrying since we started with the company.

We don't have any more non-core assets, so I don't expect any sales of non-core assets. The non-core assets were, these say La Lacteo, and the coffee business, which we've already sold.

Great. Thank you, Mariano. And if I may, my second question is related to your sugar national business in Brazil. You said in your release that a frost in Mato Grosso do Sul last month, you expect that you have a very small impact this year, right, but some 4% impact in next year's crushing rates.

And I guess my question is, how do you think you can minimize impacts from such a weaker sugarcane crushing next year? Maybe putting differently, what sort of measures could you guys take at management level to minimize the impact of low crushing your EBITDA for the division next year? That would be my second question. Thank you.

Enrico, what we've been doing, and [marcelo] may attempting, what we've been doing now in order to mediate that problem is that we've been accelerating our planting with a variety that we could be using 12 month varieties. So, that is one of the measures we've been doing. We are also buying sugarcane from third parties, and we just closed a small contract on a sugarcane from third parties. So those are the measures we are doing.

But having said this, we had enough sugarcane in our plant for next year, because during next year we are not expanding new capacity. The new capacity coming from Ivinhema will be in 2015, and not in 2014. In 2014, we are planning to reach full capacity in Angelica and Ivinhema at our current full capacity.

Okay. Thank you.

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

Hi, good afternoon. My first question is about the sugar and ethanol operations. One thing that called our attention here was the agricultural use [stones] of cane for (inaudible). It was pretty much in line with last year levels. Shouldn't your productivity be higher year-over-year, or higher the rest of the average of the [sound] sector, considering your cane field is younger? Is it because of the weather, also because of the cane variety? And I would like to know how do you see the productivity for them going forward? This is first question.

Hi, Giovana. During this year, it's in line with last year as you are mentioning, mainly because we have a relative dry summer, and that's why we are not seeing an increasing in those yields. In the future, we should expect yields to continue growing as we go forward in the year, and that's because of many of the things we are doing on the new area that we are planting now, like removing trees, like that you expect like a 5% increase in yields, like the soil that will be improving as we add other matter into that soil.

So that's why you should expect an increase in yields over the years, and you should expect us maintaining the average age of the sugarcane in line what it is today.

Okay. Okay. Perfect. And my second question is about the land market, if you can give us an update how land market is evolving in Argentina, if liquidity is in line with what you guys were expecting or not. How -- what's our expectation going forward?

Are you asking only for Argentina or for both?

No, mainly for Argentina.

Okay. Land market in Argentina in terms of liquidity, as we have always have mentioned, is relatively low, and it is as we expected, but we are being able to sell farms, as you can see in our reports, and we feel confident we will continue more or less with the same pace that we've been doing these years.

In terms of pricing, we are not seeing an increasing prices, nor a decrease, and we think that is what we are seeing in the market in terms of prices. We will have our Cushman and Wakefield evaluation in September, and let's see what this independent evaluation shows in terms of how they see the market.

Okay. Okay. Perfect. Thank you.

Our next question comes from Isabella Simonato of Bank of America Merrill Lynch. Please go ahead.

Oh, hi, everyone. Thank you for taking my question. As the planting season starts in Argentina for some crops now, [Aliqualado], could you give us an update of what do you expect in terms of planted the area or yields for the 2013 and the '14 season? Thank you.

Hi, Isabella. Sure. In terms of Aliqualado we expect more or less the same planted hectare than what we did last year, and in terms of crops also more or less in line. Take into account that we always prioritize the long-term profitability, and the sustainability of our production system. So, that's why you don't see lot of changes in terms of the different crops or they're mixing crops that we are planting this year.

In terms of yields, we do expect an average year, and in an average year, yields should be a lot better than what we had this year and last year.

Great. Thank you.

(Operator Instructions). And our next question comes from Martin Tapia of Raymond James. Please go ahead.

Hi, good morning. Thank you for the call. I have a couple of questions. First one, during the second quarter of this year, total CapEx reached $48.5 million. How much was related to the construction of the Ivinhema mill, and how much comes from the sugar plantation in Mato Grosso do Sul?

Hi, Martin. Charlie, do you want to answer that exactly?

Yes, Martin, hi. Basically, we have invested in CapEx in the sugar, ethanol, and energy about $46 million, of which $23 million was for the sugarcane planting, and $23 million for the sugar and ethanol mills, of which I would say that most of that was for Ivinhema and Angelica.

Thank you. And secondly, the Ivinhema start up in terms of production is in line with your original admissions?

Yes, Martin. It's very much in line, and we are very happy on how this start up is going, and it's much better than what did in Angelica when we did our first start up 4 years ago.

Thank you very much.

(Operator Instructions). Okay. This concludes the question and answer section. At this time I'd like to turn the floor back to Mr. Bosch for any closing remarks.

So, before we end the call, we wanted to thank you all for joining. Now, we have a semester full of challenges in all our businesses. The company is in great shape both from a financial and operational standpoint. All of our teams are highly motivated, and we are sensitive to our costs, and we continue working to deliver effective results to our shareholders. I look forward to see you in our next IR event. Thank you.

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