Adecoagro SA (AGRO) 2013 Q3 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 Third Quarter 2013 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 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 section. 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.

Good afternoon, everyone. We are very pleased to announce our results for this quarter of 2013. Over the last quarters, we have been focusing in performing in all of our businesses and enhancing our efficiencies which translates into attractive returns of the invested capital.

In our sugar ethanol, we continue with our plan to complete the cluster of 10 million tons of crushing capacity at a strong pace where we have already planted more than 100,000 hectares of sugarcane.

As of this quarter, our mix have already crushed 4.6 million tons of sugarcane which is almost 50% more than the same period of last year. We are devoted to obtain the maximum efficiencies in each link of the chain of the production that starts with the seeding and planting, harvesting [CCT], the industrial process, and the logistics in site.

In addition, our management and operating teams have been growing, and improving year after year, renewing their commitment to obtain our demanding results.

With regards to the farming, our land transformation businesses, again, we have put all our focus in obtaining the maximum efficiencies, in our processes, and from there, collect results. In this sense, I would like to remark, the dairy segment which as anticipated in the previous quarter, has our entire cow herd producing milk in our two state of [Via Cristo].

The dairy segment results has surpassed an EBIT of $2 million during the quarter. In the same direction, our rice segment has been showing notorious improvement which are translated in our results.

In this third quarter, we have started the 2013-2014 agricultural campaign and direction conditions, seeding and planting of our crop is being done on a timely fashion manner. Under the current circumstances, we anticipate a very good year for our farming business. Although, as you all know, we depend much on the weather during the next few months.

In our land transformation business, we have sold San Martin farm at a 15% premium to the independent appraisal resulting in an operating profit of 6.5 million that will be accounted in the next quarter.

We continue seeking for opportunities to monetize our land transformation and obtain effective returns, while at the same time, we reallocate our capital.

Lastly, I would like to highlight that Cushman & Wakefield issued its farmland appraisal report, and valued our land portfolio at $919 million.

We are committed to continue contributing to the appreciations of our farms by applying our sustainable production model, and the transformation of our land which at same improve the productivity of the land year after year.

Now, I would pass over to Charlie Boero, our CFO, who will explain in detail the performance of the company during this quarter.

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

The chart on page two illustrates the monthly rainfall and TRS at our cluster in Mato Grosso do Sul, compared with the historical five-year average. In the rainfalls, during the third quarter, were below average, TRS levels were affected by excessive rainfall during the month of June as well as crops during the mid-July throughout the Brazilian center-south region.

As a result of these weather events, as you may see on the chart, TRS in sugarcane during the quarter was significantly below the five-year average.

Let's move to slide 3. As you may see in the top chart, our next graph, 2.8 million tons of sugarcane during the third quarter of 2013, 33% above the third quarter of 2012. Accumulated milling year to date [extends] at 4.7 million tons, 49% above the previous year. The main drivers for this increase in performance are explained in the bottom chart.

First of all, the expansion of our sugarcane plantation to supply our mills with raw material together with enhanced operational efficiency and optimal weather resulted in a higher utilization capacity of the Angelic and Usina Monte Alegre mills.

And secondly, the ramp up of the Ivinhema mill which started commercial milling operations during April has allowed us to crush 0.8 million tons of sugarcane during the current harvest. We expect harvesting and crushing operations at our mills to continue improving at our cluster in Mato Grosso do Sul is consolidated allowing us to capture synergies and economies of scale.

On slide number 4, I would like to analyze key production and (inaudible). In the top left chart, you may observe that as the result of substantial increase in sugarcane crushing our sugar, ethanol and energy production have increased by 2.5%, 47.8% and 12.4% respectively compared to the third quarter of 2012. Ethanol production increased the most quarter over quarter.

Our mills have the flexibility to shift production between sugar and ethanol in response to market prices. As shown on the top right chart, during the third quarter of 2013, our mills maximized ethanol production. This presented the highest relative price on margin during most of the quarter.

Approximately, 53% of the TRS was shifted to ethanol production. In addition, our mills have the capacity to produce both hydrous and anhydrous ethanol.

Anhydrous ethanol created as a premium to hydrous, ranging between 11% to 18%. As a result, as you may see in the bottom left chart, 87% of our ethanol sales during the quarter corresponded to anhydrous ethanol.

Our sales volumes for sugar, ethanol and electricity also increased during the quarter as shown in the bottom left chart, however, at a slower pace than production. This is explained by our commercial strategy to carry ethanol into yearend seeking higher prices. The ethanol carry is reflected in the 72.6% increase in ethanol inventories.

Let's turn to slide 5 where we'll find the summary of the financial performance of our sugar, ethanol and energy business for the nine-month period ended September 30, 2013.

In 9M13, total sales were $200.3 million, the 11.7% of our growth sales for 9M12. [For] ethanol and energy sales, an increase by 5.9%, 15.9% and 16.8%. The increases were not so significant primarily due to first, weaker global sugar prices and second, the depreciation of the Brazilian real which resulted in the lower ethanol and energy prices in dollar terms.

Since the majority of production costs are denominated in Brazilian real, margins are expected to remain relatively stable compared to last year.

The graph on the right shows us that the adjusted EBITDA for 9M13 was $79.9 million representing a 44.8% increase from 9M12. We are still down $55.2 million. EBITDA margin has also increased from 32.2% in 9M12 to 42.1% in 9M13.

Improvement in financial performance is primarily driven by the expansion of our sugarcane plantation and the ramp up of the Ivinhema mill which have allowed us to crush 4.7 million tons of sugarcane in 9M13 representing a 49.2% year-over-year growth.

The consolidation of our cluster has led to operational enhancements which have contributed to the dilution of our fixed cost structure and accordingly improved our financial performance. We are well positioned to achieve our operational and financial targets in the fourth quarter.

Let's turn to page six where we can see that during the first nine months of 2013, we planted a total of 18,367 hectares of sugarcane representing a 6% increase from 9M12. A great majority of the planted area corresponds to the expansion of our plantation in order to supply sugarcane to our customer.

Moreover, as of September 30, 2013, our sugarcane plantation consisted of 101,270 hectares representing a 23% increase since the beginning of the year. As you may see on page 7, we completed the 2012-2013 harvest year.

Total farming production reached 699,200 tons representing a 5.3% decrease from the previous year. Yes, we're primarily affected by the drought experienced in the Humid Pampas during January and February and the North of Argentina from January to April.

On page 8, we can see two graphs showing the evolution of farming planted area. The top chart shows that farming planted area has gradually increased in 2007, '08 harvest year. For the 2013-2014 harvest year, we expect to plant 224,800 hectares, 3.5% higher than the 2012-2013 harvest year.

Even though three farms were sold during 2013 decreasing croppable land, the 3.5% increase is mainly attributed to the transformation of land previously held in our portfolio.

The bottom chart shows at all area is expected to increase from 128,900 hectares in 2012-2013 to 130,700 hectares in 2013-2014.

Adecoagro's own croppable area which is an area that provides the highest EBITDA contribution has increased by 1.4% from (inaudible) land transformation. Second crop area and leased area have also increased by 2.1% and 9.4% respectively.

As we will see in page nine, we have already begun our planting activities for the 2013-2014 harvest year. Of the 224,000 hectares estimated to be planted, as the today of this report, we have successfully planted a total of 104,000 hectares equivalent to 46% of the total planted area.

Wheat and berry were fully planted in June and the early July. Rice planting was also completed with almost 26,000 hectares fully seeded.

Random rainfalls have secured water supply in the reservoirs and rivers needed for irrigation of the rice. We are currently in the process of planting corn and soybean. Water condition to (inaudible) farms are good and our operational teams and our contractors are on set and moving forward to successfully execute the planting plan.

Let's turn to slide 10 to analyze the financial performance of our farming business during the nine-month period ended September 30, 2013. As you can see on the top chart, consolidated sales from our farming business reached $273.5 million in the first nine months of 2013, 9.8 % higher year over year. This growth was primarily driven by the increase operational efficiencies and productivity gains in our rice and dairy business.

In the case of rice, revenues were boosted by a combination of an 11.9 % higher planted area, 5.8% higher yields combined with demand, investor efficiencies driven by the ramp up of the rice processing facility.

The main driver for the improved performance in the dairy business was up 15.3% increase in cow productivity from 29.6 liters per cow per day to 32.2 liters per cow per day coupled with a 24.8% increase in our milking cow herd.

In addition, local milk prices have been favored by increasing the national whole milk powder prices. As a result, adjusted EBITDA for both the rice and dairy business have increased significantly from negative $0.4 million and negative $1 million to $6.9 million and $6.8 million respectively.

Adjusted EBITDA for the crop business have increased from $24.7 million to $28.7 million mainly driven by a $6.7 million gain from our commodity area derivative hedge position in 9M13 compared to a $10.4 million [heading] loss in 9M12. On a consolidated basis, adjusted EBITDA for our farm investment stands at $43.7 million, 57.2% higher than the same period of the previous year.

Page 11 showed the evolution of Adecoagro's consolidated operational and financial performance during the last five years.

Consolidated adjusted EBITDA for the first nine months of 2013 stands at $114.2 million compared to $70.2 million in the sane period of 2012. Total adjusted EBITDA for the first quarter of 2013 is $43.8 million making that 7.6% increase over third quarter 2012. Moreover, total adjusted EBITDA margin has expanded from 17.2% in 9M12 to 24% in 9M13 an increase from 24.4% to 24.8% in the third quarter 2013.

We expect Adecoagro's production volumes and financial performance to continue growing in line with the first five years. This growth will mainly be driven by one, the transformation and acquisition of farmland; two, the expansion and consolidation of our crops there in Mato Grosso do Sul; and three, the increase in operational efficiencies in each of our businesses.

We'll now turn to page 12 where we can see that as of September 30, 2012 Cushman & Wakefield valued Adecoagro's 285,800 hectares at $937.9 million. Since then Adecoagro sold the Santa Regina farm in December of 2012 and the Lagoa do Oeste and Mimoso farm in May of 2013 with the Mimoso farms in May of 2013, a total of 7,500 hectares for $37.1 million.

On September 30, 2013, Cushman & Wakefield updated its independent appraisal of Adecoagro's farmland valuing its 278,300 hectares as $919.3 million.

The value adjusted for the sale of both bonds increased the appraised value of our farmland portfolio by $18.4 million or 2% in September 30, 2012. We believe that an increase in the appraised value for September 30, 2012 to September 30, 2013 was mainly driven by first, the transformation of how underutilized or undermanaged land into high-yielding crop and rice land.

Second, you know, land transformation and productivity improvement of all our farmlands through our sustainable farming land projects and cutting edge technology and best practices such as no-till farming, crop rotations, balanced fertilization, integrated pest management and water efficiency practices. And finally, the increase and/or decrease in farm marketing driven by changes in commodity and input prices.

These claims are not reflected in Adecoagro's financial statements since the Company does not mark-to-market the value of farmland assets on its balance sheet. However, land transformation and appreciation are an important part of Adecoagro's business strategy and a component of total return on invested capital.

I would also like to highlight that the good value of our farmland portfolio and our values should stand at $251.8 million.

Finally, on page 12, you can see that our net debt as of September 30, 2013 stands at $681 million, 12.4% higher than the previous quarter, $539 million of bad debt is attributed to our sugar and energy sector while the $142 million belongs to farming.

Cash and equivalent as of September 30, 2013 was $260.5 million, 23.8% higher than that of June 30, 2013. Our net debt during the third quarter of 2013 grew 9.9% from $382.7 million in the second quarter of 2013 to $220.5 million.

Short and long term debt corresponding to the farming business was reduced by a total of $22.3 million as loans matured following the end of the harvest year. Overall, our debt maturity profile has improved so the third quarter of 2013, 76% of our total debt is in the long term compared to 60% as of the second quarter of 2013.

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

Thank you. The floor is now open for questions. (Operator Instructions). Questions will be taken in the order they are received. We do ask that when you pose your question that you pick up your handset to provide optimum sound quality. Please hold while we poll for questions. Our first question is Rodrigo Mugaburu, Morgan Stanley, please go ahead.

Question. One, looking at the 2013-2014 crop line in Argentina, I see that there's a small reduction in soybean first crop and an increase of corn first crop. I guess that this was on to September 30. I wonder if this is still the case or given the weather there might be some shifting from corn to soybean first crop.

And then my second crop is given the impressive results on the dairy business, what are the plants to open a third free stall dairy. Are there any plans for that?

Regarding your two questions. Number one is the change -- the small reduction in soya and a small increase in corn is coming from our sustainable production model. That is something we're always focusing. The long-term rotation is something we need to keep in order to increase the productivity of our own farms.

Furthermore, we did this planting plan knowing this current level of prices. That's something we were seeing on our own production and taking that into account, on a long-term view, the returns were better in a farm by farm or a field by field analysis. That is how we are doing our planning or we always do our planning and is how the final numbers were. And then we are not planning to change that. We are pretty much in line with completing this planting season. That is regarding your first question.

And regarding the second question of our plans on the dairy, yes, on our master plan, we do have additional free stalls. But as of now and as of today, we want to prove that this research are possible, that this research are going to continue quarter by quarter and once this is totally [true], we will continue analyzing further expansion.

Our next is Isabella Simonato, Merrill Lynch. Please go ahead.

I have a question regarding the land appraisal by Cushman. I would like to know if you could provide more details on where you saw the highest appreciation versus where land did not appreciate as much for you to get an overall appreciation of 50% of your portfolio. Thank you.

The Cushman & Wakefield appraisal is an independent appraisal and we have the figures and there's not an important change between countries or between the different places on the increases or not increases.

My personal thinking there is that in general terms, within South America, we haven't seen an important appreciation of the land simply because of an increase of value of the land. We've only seen appreciation and particularly in this farmland also where we have been having a land transformation or where we have been having an increase in productivity.

And that is always coming because of the sustainable production model where we have land or soils that are more fertile over the years or where we have an increase on the utilization of the -- or the efficiency of this utilization of water like in the land leveling that we are doing in the rice operation.

So there is where we see most of the increases on the land appreciation. And finally, as a final remark, according to the Cushman & Wakefield is putting today, we've been improving through the sales of the different farms as this last farm that we sold, the San Martin farm, that we've always been selling at a premium of this in the (inaudible) evaluation.

Our next question is Enrico Grimaldi, BTG Pactual, please go ahead.

My question is also related to your updated land appraisal, okay. You mentioned in your release and also earlier in the call today that most of the 2% year-over-year appreciation in your land portfolio is related to land transformation. So I would like to know how many hectares in the [Lagoa] portfolio are still undeveloped or underutilized as you mentioned and how is the transformation of this land playing out and what pace, right?

Put in differently, how many additional hectares of new developed lands will we expect in the coming years for Adecoagro without assuming acquisitions that's basically it. Thank you.

According to your specific question, we still have 12,000 hectares that can be considered as a fully transformation from non-proactive to proactive hectare but part of this transformation or part of this important transformation is, for example, the level zero that we are doing in our rice field on our irrigated rice field. We still have 12,000 hectares to be transformed in the next two or three years into a level zero.

That is a very important change and is a CapEx that is required into this land transformation that we are talking. And on top that we still have for our proactive hectare, specially the ones in the Humid Pampas where through this sustainable production model that includes the no-till and the crop rotation that I explained at beginning of the call.

We are also increasing the productivity of that farmland so all that means the land transformation that we are doing and make an increase on the price of the land that is not strictly dependent on simply land appreciation as overall of the farm.

Our next question is Gabriel Kim, Wellington, please go ahead. Mr. Kim, is it possible your phone is on mute? We're not able to hear you.

The question I have for you was also related to the appraisal. If the appraised value was up 2% and that was driven primarily by this transformation activity, I guess the other pieces of that would be the currency and sort of the underlying local inflation on the asset.

So can you kind of give us a sense for how the underlying price appreciation worked out for the hectares that were in the portfolio? I mean the question basically, does the portfolio appreciate before currency adjustments or was it flat? How did it do on an underlying local currency basis?

Yes, I see your point. In dollar terms, that is how we are measuring. We are or my assumption is that the portfolio has not appreciated, that their portfolio has maintained its value.

In local currency terms, of course there has been an increase of the value. But as there is inflation and as the effects have been changing or the effects in general have been -- the dollar has been appreciating, in dollar terms we assume that the land has maintained its same value or more or less the same value.

(Operator Instructions). Our next question is Giovana Araujo, Itau, please go ahead.

My first question is about the agricultural yields in the sugarcane operations. We see that there's still a gap in Adecoagro's agricultural yields and the center-south average. What we'd like to understand how do you explain this gap, is it more linked to cane varieties and if you see them -- this gap reducing in the middle term? That's the first question.

As you well know, all our sugarcane plantations in Mato Grosso do Sul we've been growing to this more than a hundred thousand hectares that we have already planted. We are starting to see the second cycle of our sugarcane and we see much better results in terms of yields in the second cycle of the sugarcane.

One cycle of sugarcane is six years. So this second cycle is where we find a much better soil structure. The organic matter that has been contributing during this first cycle is an important improvement including their fertilization and this -- again, the sustainable production model with which we try to treat the sugarcane operation.

So that's why we do expect to narrow this gap in the following years as we start seeing more of this second cycle. And within the startup process, the quality of the planting that has been improving year after year is something that again we are starting to see the results.

Furthermore, in terms of all the planning of the varieties and the harvesting time of each one of these varieties, we are -- as we are completing our sugarcane capacity we are improving on all that planning and so we are seeing this gap narrowing in the future.

And if you can see in the past there has been an evolution where we've been improving even though the climate has not been a good climate in the last two years, especially in this last year where we had the frost and rainy June that was not the best climate as you can see. So basically, that would be the comment regarding the yields.

And the second question is about your planting plan. When we look at your estimates for 2013-2014, it seems the bulk of the growth in the total farming planted area will be based on leased area, right? Is there a change in the economics in farming based on leasing versus last year?

Sorry. No, we are not growing in the leasing area.

No, okay.

No, we are growing. Sorry, in the plant -- the growth on the leasing part of the area is very, very small. It's more important on the own hectares.

But is there a change in the economics of farming based on leasing in Argentina?

Yes, in Argentina, there has been a slight improvement based on leasing. The leases have been reduced significantly and that's due to a portion of our leases have been passed to the sharing results with the owner of the land. So it's a different system, where near 40% of our leasing area has been moved into this sharing results with the owner of the land.

Our next question is Martin Garzaron, City of London, please go ahead.

Quick question and a little bit more of a philosophical one if you want. We're seeing US oil production growing very fast. And that is something that is not going to change. So we're also seeing the possibility that the content of ethanol in gasoline is going to be reduced.

So my question is a little bit I mean the effects of this, you could say, could -- that could free up quite a lot of corn making the corn price to stay lower than previously expected. And to some extent that could also affect the price of ethanol.

And my question is, what's your view? Are you planning anything? Obviously, you have a competitive advantage in terms of cost. Are you going to be able to sell better in the U.S.? Are you going to move production more towards sugar? What's your view on sugar? So that's a little bit of a complicated question. But that's -- I would like to hear your views.

Good question and it's something that we are looking at of course. Basically, we've decided not get into the corn ethanol base. We are looking at the sugar and ethanol cost. And the sugar and ethanol cost of production is much lower than the corn ethanol cost of production. So that is the key and we've analyzed that in terms -- in economic terms and in energy terms. And in energy terms, we have a lot of analyses.

They're aware is five to 10 times or nine times lower the cost of producing ethanol from sugarcane than from ethanol. So that is a very important part of our view and that's why we are involved in the ethanol through the sugarcane production and nothing through the corn ethanol base.

Secondly, Brazil's cost of production or Brazil's cost of oil production is higher. And Brazil has a very well-developed distribution of all the ethanol and the consumption of ethanol. And that's something in the domestic markets that we still see with an increasing demand.

(Operator Instructions). Please hold while we poll for 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.

Before ending the call, I would like to remark that Company's management and operating teams are fully motivated, are focused in obtaining maximum efficiencies. Always looking for excellence in all the chain of production and at the same time maintaining a low cost creating value and attractive returns to our shareholders.

As this is our last earnings call of the year and in the case that we don't see some of you before our next call, we would like to wish you an excellent end of the year, full of good weather and yields. Thank you very much, everyone.

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