Adecoagro SA (AGRO) 2013 Q4 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 fourth-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 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 further 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 that could 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. You may begin your conference.

Good morning, everyone, and thank you for joining our call. We concluded the 2013 fiscal year with excellent operating results. Our sugar, ethanol and energy business had a very good performance during the year. Our mills crushed 6.4 million tons of sugar cane as a result of the successful completion of the first phase of the Ivinhema mill, the mechanization of operational efficiencies from the Angelica mill, and the expansion of our sugarcane plantation which reached 100,000 hectares.

We are currently commencing the construction of the second phase of Ivinhema which is expected to increase the capacity of our cluster to 9 million tons per year by 2015.

As we consolidate our cluster, we begin to capture the efficiencies and synergies generated by our two state-of-the-art mills surrounded by one large sugarcane plantation. Some examples include reduce our (inaudible) to the mills, optimize sugarcane logistics as well as harvest efficiencies [and activity].

Our focus is to continue expanding our sugarcane plantation. During 2013 we planted 25,000 hectares, even 10% higher than the previous year. All this will allow Adecoagro to become one of the most efficient and low cost producers of sugar, ethanol, and energy.

In the farming business, we concluded the 2013 fiscal year with significant improvements in our crops, rice and dairy segments, which enhanced our EBITDA generation. Our land transformation business once again delivered excellent results. I acquired or monetized five farms, each at the premium to the Cushman and Wakefield independent operation of September 2013. These farm sales reflect the execution of our strategy of generating more attractive returns for our shareholders. Accordingly, our Board of Directors approved the implementation of a share repurchase program to enhance our ROICs.

In essence, our focus is set on achieving the highest operational efficiency in order to increase the cash generated by each of our businesses. We are confident that 2014 will be a good year, driven by the increased production and operational efficiency that improve our production costs combined with the recent recovery in commodity prices.

Now I would like to ask Charlie to walk you through the main operational and financial highlights of the quarter. Charlie, please go ahead.

Thank you Mariano, and good morning everyone. I would like to walk you through a few slides that reflect the main operating and financial highlights of the fourth quarter and the 2013 fiscal year.

Starting on Slide 2, I would like to go over the operating performance of the sugar, ethanol, and energy business. Our mills crushed 1.8 million tons of sugarcane during the fourth quarter and 6.4 million in aggregate during 2013, respectively 29% and 43% higher than the previous year. As you may see on the bottom chart, this growth is (inaudible) or driven by the ramp-up of the Ivinhema mill which started operations in April 2013 and higher capacity utilization at the Angelica and UMA mills. Supplying our mills with sugarcane to reach this level of milling was possible as a result of our 16% expansion of our sugarcane Plantation, up 5% increase in sugarcane yields and the opportunistic acquisition of 600,000 tons of cane during the harvest from other farmers and mills. We expect harvesting and crushing operations at our mills to continue improving as our cluster in Mato Grosso do Sul is consolidated, capturing synergies and economies of scale.

Let's turn to Page 3, which illustrates the monthly rainfalls and TRS content at our cluster in Mato Grosso do Sul compared to the historical five-year average. Average TRS at our operations reached an average of 127 kilos per ton of sugarcane in the fourth quarter, and 126 kilos per ton during the full year, 9% and 5% respectively below the historical average, partially offsetting the growth in crushing volume.

As you may see on the chart, TRS levels were negatively affected by excess rains during the month of June and the strong frost that hit the Brazilian Center-South region during mid July.

Let's move on to Slide 4. Our mills were designed with a high flexibility to produce BHP sugar, crystal sugar, hydrous ethanol and anhydrous ethanol. Our commercial and industrial teams are able to adjust the production mix on a weekly basis towards the most profitable product based on relative market prices.

Our product mix in most of 2013 was planted towards maximizing ethanol production. On average, 53% of the sugar content was shifted towards ethanol and only 47% towards BHP sugar.

As you may see on the charts of the right side of the page, our production of sugar, ethanol and energy has increased by 23%, 14% and 15% respectively during the fourth quarter and 19%, 46% and 26% respectively year-over-year. Production growth was driven by the increase in sugar in crushing and offset by the reduction in TRS as described in the previous slides.

Let's turn to Slide 5, where I would like to analyze sales volumes and net prices during the period. As you may see in the two top charts, sugar and ethanol sales volumes increased significantly quarter-over-quarter, and year-over-year, driven by an increase in sugarcane crushing. However, the increasing sales volumes was lower than the increasing production volumes as seen on the previous page. In the case of ethanol, this is explained by a strategic decision to carry ethylene inventories into the off-season to capture higher prices. In the case of sugar, it is explained by delayed export shipments. As you may see in the bottom right chart, sugar and ethanol year-end inventories have increased by 59% and 45% respectively. As a result, sales and margins have been transferred from 2013 to 2014.

Let's now take a look at the bottom left chart where we can see the evolution of our energy sales volumes. Although cogeneration exports to the grid increased 53% year-over-year and 12% quarter-over-quarter as a result of a higher volume of cane crushed, cogeneration measured in kilo an hour per ton of cane crushed decreased by 12% in 2013 and 10% in fourth quarter. The decrease in exported energy year-over-year is explained by a delay in bagasse burning at Ivinhema as a result of the start up process. Consequently, at the year-end, we held a large stockpile of bagasse which we started burning in March 2014 in order to capture the current high energy prices which increased to over BRL800 per megawatt hour as a result of low water levels in the Brazilian hydroelectric resources.

The increase in sugar and ethanol volumes was offset by lower prices. Sugar prices were an average 16% below year-over-year and 11% below quarter-over-quarter, mainly as a result of our three-year global supply surplus. In the case of ethanol, prices measured in Brazilian Reais increased (inaudible) tax exemption. However, measured in US dollars, ethanol prices were on average 15% lower year-over-year and 16% lower quarter-over-quarter as a result of the depreciation of the Brazilian Real.

On the other hand, despite the depreciation of the Real, energy prices increased 13% in dollar terms year-over-year as a result of the inflation adjustment of our long-term energy contracts at the Angelica and UMA mills and higher spot prices for the energy exported by the Ivinhema mill.

If we turn to Page 6, I would like to further analyze our strategic ethanol carry. I assume you have seen the chart, both hydrous and anhydrous ethanol prices, which reached its lowest point during August. Hydrous prices dropped to BRL1085 per cubic meter, while anhydrous prices dropped to BRL1237. At that time, we decided to reduce our (inaudible) volumes and begin filling up on storage tanks of the new. In November and December, we increased our sales pace, driven by an increase in prices. By year-end, we still had 74,000 cubic meters of ethanol stored in our tanks to carry into the inter-harvest season. Between January and March, (inaudible) suspended their crushing activities to allow sugarcane to grow. At the same time, mills are dismantled to undergo maintenance of equipment and machinery in preparation for the upcoming harvest. As a result of this seasonality, supply of ethanol is reduced, generally leading to an increase in prices. As we may see in the chart, ethanol prices continued increasing, appreciating January through March over BRL1550 per cubic meter in the case of anhydrous, and over BRL1430 in the case of hydrous ethanol. Although our ethanol carry strategy resulted in the transfer of sales and margins from 2013 to 2014, it allowed us to increase our margins and generate attractive returns.

We will now move on to Slide 7 where we may see in the top-left chart that net sales reached $109 in the fourth quarter of 2013 and $297 million in 2013, marking a 10% and 9% growth respectively. This growth was driven by the increase in sugarcane crushing and production volumes and offset by lower commodity prices and high inventories, as discussed in the previous slides.

Adjusted EBITDA of our sugar ethanol and energy business through the fourth quarter of 2013 was $35 million with an EBITDA margin of 34% compared to $42 million and 43% in the fourth quarter of 2012 respectively. This reduction is mainly driven by 9% lower TRS content as a result of the frost which impacted the Center-South region of Brazil in mid July of 2013, lower sugar and ethanol prices, and the commercial strategy to carry ethanol inventories into the enter harvest season.

On an annual basis, adjusted EBITDA in 2013 totaled $115 million, 18% above 2012. Adjusted EBITDA margin during the period expanded to 49% from 36% in 2012. The improvement in financial performance was primarily driven by a 43% increase in cane milling resulting from a 16% expansion of our sugarcane plantation, the ramp up of the Ivinhema mill which increased our normal crushing capacity by 2 million tons, and a 5% increase in sugarcane yields. The growth in crushing and production was partially offset by a 5% reduction in TRS content, as previously explained, lower sugar and ethanol prices throughout the year, and higher year-end sugar and ethanol inventories.

The consolidation of our cluster has led to operation enhancements which have contributed to the dilution of our fixed cost structure and accordingly improved our financial performance. We are well-positioned to continue improving our performance during the upcoming years as we increase our utilization of crushing capacity, expand our nominal capacity to 11 million tons through the completion of the Ivinhema mill, starting up the productivity of sugarcane plantations and fine-tune operations.

As you may see on Slide 8, during 2013, we planted a total of 26,000 hectares of sugarcane, 10% above the area planted in 2012. On the graph on the right, you can see that our sugarcane plantation reached a total of 99,000 hectares, 16% above the 86,000 hectares in 2012. The increase in planted area year-over-year was accomplished as a result of a larger agricultural team and higher planting efficiencies. Sugarcane planting continues to be a key strategy to supply our mills with quality raw material and allowed Adecoagro to become an efficient low-cost producer.

On Slide 9, I would like to update you regarding our Ivinhema greenfield mill project. The construction of the first phase of the mill was successfully completed during the beginning of 2013, on schedule and on budget. Ivinhema's milling operations commenced on April 25 with 2 million tons of nominal crushing capacity, generating important synergies and efficiencies with the Angelica mill.

We are currently building the second phase of Ivinhema, which will expand milling capacity to 5 million tons per year by 2015 rather than 4 million tons as originally planned. Enlargement of Phase II will allow Ivinhema to enhance operational efficiencies and economies of scale, improving financial performance and accelerating cash flow generation. Phase II will consist of expanding the milling equipment, building a new fluidized bed boiler, two new electrical generators and expanding the sugar factory and ethanol distillery. Annual production capacity is expected to increase to 300,000 tons of sugar, 240,000 cubic meters of ethanol, and 360,000 megawatt hours of energy exports. Total CapEx for Phase II, including the industrial equipment, agricultural machinery and sugarcane plantation, is expected to reach over BRL580 million and financing has been secured by [VNDS] and cash flow generation.

We will now turn to Slide 10 of the presentation and move on to the performance of our farming business. In the second half of 2013, we began our planting activities for the 2013/2014 harvest year. As of December 31, 2013, 198,915 hectares were successfully planted. Planting activities continued throughout early 2014 and as of the date of this report, planting for the 2013/2014 harvest has been fully completed with a total of 218,719 hectares seeded, excluding sugarcane.

Adecoagro's own cropable area, which is the area that provides the highest EBITDA contribution, has increased by 4% as a result of land transformation. This area has increased by roughly 1,536 hectares since it is an opportunistic business driven by returns.

Second crop area was reduced by 4,900 hectares as a result of higher expected margins for planting soybean first crop compared to the expected margin of planting wheat followed by soybean second crop. In aggregate, total planted area has increased slightly.

Planting conditions for the 2013/2014 harvest year have been adequate. On average, planting was done in a timely manner and conditions for the initial growth phase of the crops were good.

Let's move on to Slide 11 where we compare the rains in the current harvest season with the previous harvest. The green bars represent rains during the 2012/2013 crop and the orange bars represent the current 2013/2014 crop. During December 2013 through mid January 2014, the main productive regions of Argentina offered lack of rains together with a high temperatures, which negatively affected the normal development of the early planted corn. However, since mid-January, rains have normalized and returned to their historical levels. During January and February, we received over 400 millimeters of well distributed rains, significantly above the previous harvest year. This has allowed crops to develop normally. Assuming average weather continues into harvest, we expect yields and margins to increase compared to previous crops.

Moving on to Slide 12, you will find the financial performance of the farming business for 2013 compared to 2012. Starting on the left, we may see the financial performance of our crops segment. Sales in 2013 were 6% lower than in 2012 primarily driven by lower sales volumes for cotton and wheat as a result of a decrease in planted area. Lower volumes were partially offset by higher commodity prices for most crops. Adjusted EBITDA of our crops segment increased from $34 million in 2012 to $37 million in 2013, namely as a result of our commodity hedge position. During 2013, our hedge position generated gains of $8 million, mainly in corn. These derivative gains more than offset the lower crop yields and margins.

We will now take a look at the right segment. Raw sales during 2013 reached $107 million, 14% higher than 2012. Adjusted EBITDA stood at $13 million, 161% or $8 million higher than 2012. Our financial performance was a result of a 6% increase in rice yields driven by the implementation of zero-level technology over 22% of our rice fields, expansion of our planted area by 12%, and a 6% increase in net average white rice prices compared to 2012. The operational performance of the business has been enhanced by the proper integration of operations, including farm, processing, commercial and logistics.

Next, we will take a look at the dairy segment. Raw sales during 2013 reached $31 million, marking a 55% increase over 2012. During the same period, adjusted EBITDA totaled $10 million, $12 million higher than the previous year. This was primarily driven by improvements in operational performance. Milk production reached 73 million liters in 2013, 33% higher than 2012. The increase in production is the result of a 21% increase in our milking cow herd coupled with improved cow productivity. Average productivity during 2013 reached 33 liters per cow per day compared to 30 liters during 2012.

In addition, milk prices during 2013 have been favorable, driven by international whole milk prices. Local milk prices during 2013 averaged $0.42 in US dollar terms, 22% above the previous year. We expect cow productivity to gradually increase to an average of 35 liters per cow per day as new cows adapt to our second free stall dairy which started operating at the end of 2012 and will be fully populated with 3500 cows in mid-2014.

Let's turn to Slide 13 and take a look at our land transformation business. During the fourth quarter, we successfully sold the San Agustin and San Martin farms. The San Martin farm was sold for $17.5 million, representing an 19% premium over the latest Cushman and Wakefield independent operation. The transaction generated $14.9 million of adjusted EBITDA and resulted in an IRR of 20%. The San Martin farm was sold for $7.8 million, representing a 15% premium over Cushman and Wakefield. The transaction generated $6.3 million of adjusted EBITDA and resulted in an IRR of 34%.

In aggregate, in 2013, we monetized five farms or 14,000 hectares of our developed land portfolio, including San Agustin, San Martin, Santa Regina, Lagoa de Oeste and Mimoso farms. Both farms were sold at premiums to the Cushman and Wakefield independent appraisal dated September 30, 2013 and generated in aggregate $59 million of cash receipts and $28.2 million of adjusted EBITDA.

The chart on the bottom of the page shows Adecoagro's record of farm sales. Monetizing a portion of our development portfolio each year allows the company to reallocate its capital efficiency and generate attractive return on invested capital for its shareholders. Since 2006, we have sold a total of 15 farms with over 51,000 hectares generating capital gains of over $160 million.

Page 14 shows the evolution of Adecoagro's consolidated operational and financial performance during the last five years. Consolidated adjusted EBITDA in 2013 totaled $180.7 million, marking a 28% growth compared to 2012. Adjusted EBITDA margin during the period expanded to 29% from 24%. The improvement in financial performance was primarily driven by a 30% growth in our farming and land transformation businesses and an 18% growth in our sugar, ethanol and energy business.

As discussed throughout the presentation, the performance in the farming business was primarily the result of an increase in cow productivity coupled with higher milk prices in our dairy business, higher yields and prices in our rice business, and the sale of five developed farms in our land transformation business. The growth in our sugar, ethanol, and energy business was mainly driven by a 43% increase in sugarcane milling volume as a result of the expansion of our sugarcane plantation, the ramp-up of the Ivinhema mill and higher cane yields. The increasing milling was offset by lower TRS in cane, lower prices and our ethanol carry strategy, which has postponed sales and margin recognition to the first quarter of 2014.

In addition, our corporate expenses were reduced by 8%, attributable to our cost reduction plan and the devaluation of the Argentinean peso and the Brazilian real. We expect Adecoagro's production volumes and financial performance to continue growing in line with the historical growth, mainly driven by the ramp-up of the Ivinhema mill and the increase in operational and financial efficiencies in each of our businesses.

Let's move on to Page 15 where we see that Adecoagro's gross indebtedness as of the end of 2013 stands at $664.1 million, 3% lower than the previous quarter. Shorter long-term debt corresponding to the farming business was reduced by a total of $22 million, or 19%, of notes matured following the end of the harvest year.

In the sugar ethanol business, total debt remained flat. However, we have reduced our short-term debt by $9 million, and increased our long-term debt in the same amount related to the construction of the Ivinhema mill.

I would like to highlight that 78% of our debt is in the long term, composed mainly of loans from multi-level banks such as the [BNDS] and Inter-American Development Bank. Total cash as of December 31, 2013 was $232 million, 11% below the previous quarter. As a result of the decrease in outstanding debt and the reduction in cash, net debt as of year-end was $428 million.

Finally, I would like to turn to Page 16 to focus on our outlook for the 2014 fiscal year and highlight some recent market developments which will be positive for our business. First of all, I would like to highlight that we expect our sugarcane cluster Mato Grosso do Sul to increase the utilization of its nominal crushing capacity during 2014. During 2013, our (inaudible) 5.3 million tons of cane representing a 74% utilization at nominal capacity. Our focus on expanding our sugarcane plantation will allow us to increase milling and capacity utilization during 2014. Since over 90% of our costs are fixed, its marginal ton crushed has a positive impact on our profitability.

Secondly, I would like to focus on the devaluation of the Argentine peso. As you may observe on the upper right chart, in January of 2014, the Argentine peso experienced a 22% devaluation from a ARS6.5 per $1 to ARS8 per $1. Given the majority of (inaudible) agriculture production is (inaudible) to export market, a significant portion of the company's revenues in Argentina are dollar denominated. The majority of our production costs are denominated in local currency with the exception of fertilizers, our chemicals and seeds. Accordingly, the net effect of the devaluation of the Argentine peso is positive to our margins.

Third, I would like to comment on commodity prices. The chart on the bottom right shows future prices for some of our most important commodities, including corn, soybean, wheat, and sugar. Since the beginning of the year, many commodity prices have risen to more attractive levels. In the case of grains, the increase is driven by strong demand and concerns that the political unrest in Ukraine coupled with tension with Russia will delay exports from the Black Sea region (inaudible) to hold production to hedge against inflation and possible devaluation.

In the case of sugar, prices bounced 8% as a result of a serious drought experienced in Brazil's Center-South region which is growing concerns that the new cane crop may see yield losses and reduced sugarcane production. The drought experienced in Brazil's Center-South region brings me to the fourth point I would like to highlight, the increase in Brazilian energy prices.

Subsequent to the low water levels in the Brazilian hydroelectric reservoirs, energy prices during the beginning of the year have spiked to BRL800 per megawatt hour. We will be able to capture a portion of these attractive spot prices and improve our operating margins through the energy produced at the Ivinhema mill which is not yet fully contracted.

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

(Operator Instructions). Giovana Araujo, Itau BBA.

Hi everyone. Good afternoon. My first question is about commodity prices. Your fourth-quarter sales prices of wheat price and milk were substantially above last year, 64% for -- 39% milk 36% rice. What's the main reason behind that year-over-year growth besides the strength in the international market?

This is Mariano. We couldn't understand anything on the question. Can you speak a little bit louder? We are not hearing well.

Okay. My question is about commodity prices. We saw substantial growth in your wheat, rice and milk prices year-over-year. And I would like to know what's the main reason behind that growth besides the strength in international markets?

Sure. I would ask Marcelo Sanchez to answer your question.

This is Marcelo. Regarding the first of the commodities you mentioned, the wheat, basically the prices that -- the price increase that you are seeing is basically due to the internal Argentinean situation that made up -- captured better prices locally in Argentina, has the positive average price compared to external prices. That's basically what we saw in wheat.

In Rice we have in very active. We mentioned that during the last conference call, that we did have in previous earnings releases that we have been really active in going into the destination with our rice. We've been participating actively in big government tenders and that gave us a chance of improving our price in the rice business year-over-year.

And in the last comment that you're asking regarding (inaudible), as you'd probably be aware that, the worldwide situation regarding dating prices influences positively in our results during last year in dating.

Okay. Thank you. And my second question is about sugar and ethanol. If you could detail what is the impact of the drought in your expected yield for 2014, 2015 and also crushing, and if you see any room for improvements in yield on the backlog (inaudible) lanes in your region. Thank you.

The impact of the drought that we have seen is much higher in the Center-South than in our own operation, as you saw in some of the charts. The rains that we had during January and December were below average. But during February and March, we were at average rainfall in our cluster. So we think that, in our cluster, we may have impact compared to what we were budgeting, but we don't think that impact is going to be too important.

Also, I would like to add that, regarding the yield, we continue to see our yields Mato Grosso do Sul to continue to improve year-over-year because of the reasons we've already mentioned in our previous call, that the sugarcane plantation is improving every time and that (inaudible) is better prepared and starts with the second cycle of sugarcane, we can expect our sugarcane yields to continue evolving positively in the cluster.

Okay, thank you.

Rodrigo Mugaburu, Morgan Stanley.

My question is also on the strategy on the sugarcane segment. I was looking at the chart with the investment meeting for the second phase of (inaudible). I was wondering if during the situation sector in the field I'm sure that there are cheap -- is there any room for M&A? I'm sure there are very cheap mills out there that will be much cheaper than the GREENFIELD at this point. Did you consider that? I'm sure there are synergies because (inaudible) really up and running on the cluster. But do you know how cheap the sector is getting? Are you thinking is there any room for M&A on the region? Thanks.

Yes, of course we are always considering the potential M&A. We have been looking at many. But here it is important to understand the synergies of the second phase of Ivinhema. The synergies that we are getting there and the IRRs that we get increasing the capacity in the cluster are much much higher than any of the different alternatives that we see on the M&A. And we have been looking at many different alternatives in the sector, and as you mentioned in theory, cheap prices. But when you go to the IRR of the returns that you are getting to the money that we would be investing, completing the cluster is by far the best use of our money that we are getting.

Thank you.

Enrico Grimaldi, BTG Pactual.

My question is regarding the [DVMMU]. You went off (inaudible) expansion with the second expansion phase now already (inaudible) done for additional capacity (inaudible) before, the second phase specifically. Just want to confirm with you if that is in fact only anticipation in this category of the greenfield or is this (inaudible) might actually be higher than the estimated 6.3 million pounds we have for 2017. And if it's all anticipation, what changed that makes you now able to ramp up (inaudible) capacity faster. It's more land of PDD. Is it a better sugar price scenario? Is it good momentum to acquire machinery and farm equipment? I just what you to understand these dynamics and what has changed. That's my first question. Thank you.

We are anticipating, we are not budgeting a higher number in the long run, so regarding the first part of your question is that we are anticipating. And we are -- and the second part of your question is we are doing pretty well with planting. I mentioned we planted 25,000 hectares in 2013. That was 10% higher than 2012. We are very optimistic on how we are planting during 2014 and we think that we can achieve this planting. And probably the planting phase is the most important, is what gives us the growth phase. So this is doing well.

And when you start to analyze -- or when we were realizing the second phase, there were some alternatives and some opportunities to acquire this fluidized boiler plus some other things that were a little bit different than the original plan. Maybe Marcelo Vieira can add a little bit, more but there were clear opportunities there where, with even less than what we were budgeting, we could increase the crushing capacity on 3 million tons of the 2 million originally planned. This of course accelerates our cash flow generation, and so improves the IRR of this whole project. I think that's main. Marcelo Vieira, if you want to add something, let us know.

I would say that the revision of this project was mainly due to our improving the technical design of the mill using more efficient equipment so that we can grow capacity without significant additional CapEx. And this improves the return of the project. But this doesn't modify the overall final design of the project to reach the capacity of 6 million tons.

Thank you, Marcelo. My second question, I think Marcelo can help on that. It's actually a follow-up on the first question. I can also see on your presentation here that your cost, the second phase cost is way lower than the first phase cost you have on a reais per ton basis. So if you could please share with us the main reasons why. I mean the second extension phase is so much cheaper than the first phase, it will be great. I see that most of it is in agriculture equipment, but if you could talk about more about it, I would appreciate it. Thank you.

In every new greenfield project, the second or third phases are always less expensive than the first one because the first one includes all the main infrastructure for the project, all the main buildings, all the main houses, all the main storage. So the second phase is mainly additional equipment or completion of equipment that was designed to have a higher capacity. That's why the second phase always has lower CapEx than the first one.

To add to Marcelo, a simple clarification on the presentation on Page 9. The industrial equipment is $388 million and $282 million for the second phase. And the agricultural equipment is $78 million and $174 million. So they are inverted. The numbers on the right are inverted on the industrial equipment and agricultural equipment. (multiple speakers)

Of course what I said is about the industry regarding some pace and there's no meaningful difference.

That's great. Thank you.

(Operator Instructions). Isabella Simonato, Bank of America Merrill Lynch.

Hello. Good morning everyone. Regarding the sugar, I was wondering if you accelerated or not the hedges during this first quarter, and what is your view considering all the weather issues in Brazil and the potential decline in supply. Thank you.

I'm going to ask Marcelo Sanchez, our commercial director, to answer your question.

As you know, the expectation on the harvest is where most of the attention is now. And our hedges as of today, it is around 60%. We are still -- we are really pretty constructive on the second semester in terms of prices for the sugar and as well as ethanol is allowed. I think we are going to be able to get better prices in the next half of the year.

Thank you. Can you just confirm the amount of the hedges, 60%?

Yes.

Okay. Thank you.

Ravi Jain, HSBC.

Good morning. I just had two questions. The first one just following up on the Brazilian drought. Do you have an expectation of what are the South-Center sugarcane crushing that we expect in 2014 and 2015? And my second question is on the farming revenues. What cost per hectare increases do you expect in 2014 versus what we saw in 2013? Thank you.

Sorry. Can you repeat again the first part of the question?

Sure. The first question was do you have an expectation of how much sugarcane will be crushed in the South-Central region? As of today, what is your expectation for the upcoming harvest?

Okay, sure. I'm going to ask Marcelo Sanchez to answer the first part of your question.

We're still thinking on --this is our expectation is around 370 tons of crushing expected for this year. But as you know, there's something that could be still influencing these numbers. There's nothing that could be giving us a certain answer at this time, just starting to see some now.

Sure, thanks.

And regarding the second part of your question, whether the costs -- how the costs compare this year to the previous year, we see, for our company in particular, we continue to improve on the efficiencies. And this makes costs even lower than last year. In the rice, we have a clear improvement in the costs, so costs -- you will certainly see lower costs than what we had in the previous year.

In the rest of the crops, you will also see some improvement in terms of costs. And that is mainly in Argentina and (inaudible) a little bit of improvement on this and in Brazil also a little bit of improvement on the crops and more improvement on the sugarcane because of the improvements of the efficiencies I was mentioning. And in general, for the market, I would see costs being a little bit better while the currencies stay weakened in each country.

That's helpful. Thank you.

Gabriel Lima, Bradesco.

Thanks, good morning. My question is with regards to the peso devaluation which you mentioned in your presentation. So I just wanted to get a sense on how do you see margins evolving? I know it's a bit early to say, but what would be the expected impact of these currency devaluations in the margins in the (inaudible) in Argentina as well as a possible impact that you see impacting land prices in Argentina.

Sure. The devaluation is the clear impact on improvement -- of an improvement in margins. 80% of the sales are exports, so this clearly improves the margin while 60% of the costs are in local currency. So this combination makes a clear improvement on the margins or the expectation of the margins because of devaluation.

And I would say that for land prices, the impact is is exactly the same. As you improve margins, you will expect to improve land prices and always in dollar terms. Specifically in Argentina, the land farm is always discussed in dollar terms and there we are in local currency. (multiple speakers)

Go ahead.

No, I think that was clear that the demand of the farm (inaudible) lower sales also.

Okay. And just to follow up on the dairy and rice performance, I guess you mentioned favorable pricing for both segments, but I guess you have been doing some operational improvements as well. So, I just wanted to understand how much of this margin improvement for rice and dairy was related to favorable pricing vis-a-vis the improvement, the operating improvement, you're doing in both segments please?

Difficult to split how much to each one, but I would say that the most important is probably all the improvement on the operational efficiency. While you talk on the baby segment, the operational efficiencies are very clear because we finished our freestyle number two, and so we went from an improvement in the comparability of almost 10%. That improvement in comparability is the revenue, and there are also improvements in cost efficiencies. I am especially talking on the conversion of each ton of feed that the cow receives converted into milk. So, that improvement on the ratios of efficiency are the most important impact in the dairy segment.

When I go to rice, I would say that there is clear improvement on the use of water, the cost of production, the amount of people that we are using for each hectare. We are using different techniques that things are being consolidated every year. We are now stabilized for the second year with more or less the same amount of hectares. That makes the team, say, much more efficient in all terms, including techniques like CO leveling and other things that we are specifically applying, combined with the improvement on the logistics that Charlie was mentioning with the sales, the commercial theme that is now based in Uruguay and all the logistics going from the farm to the mills, each one of the mill, and the operation of each one of them is specifically (inaudible) the new mill that is now fully operational. So I think there is a huge improvement on all the operational efficiencies and when it's combined with okay pricing.

Okay. Thank you very much.

Viccenzo Paternostro, Credit Suisse.

Hello everyone. Thanks for the question. My question is regarding the energy, the surplus of energy that you have. I'd like to understand what's the volume exposed to spot price and the volume exposed to long-term contracts. Basically, I'd like to understand what's going to be the benefit of the higher spot price, energy spot price, in Brazil. As we know that spot price skyrocketed more than double recently because of the droughts. That's my question. Thank you.

Okay. I will ask Marcelo Sanchez to answer this question.

We have been closing closely monitoring the market, the expected market, for the spot since December last year, and we left aside around 20% of the energy to be sold in the spot market and joined the spike in prices that we have been witnessing within the last 60 days. And I think this is going to be constant for the whole year and for the whole of this year. And the rest of the 80% remaining is already being contracted.

Okay, thank you.

I'll simply add on this is we had the (inaudible) from last harvest and that's why we started producing energy at the beginning of March, and that's why we are taking a specific advantage of today's spot prices. We are generating energy during March while we would become milling by March 25.

Okay. Do you have any type of numbers or at least a guidance for this higher pricing, $1 million, or any indication what's going to be the benefit for this higher spot price?

No, we don't give guidance. It's clear you can make your own calculation. We started generating energy almost at the beginning of March and we are making some good money with the spot prices on this mark.

Okay, thank you.

(Operator Instructions). Showing no further questions, this concludes our question-and-answer section. At this time, I would like to turn the floor back to Mr. Bosch for any closing remarks.

I would like to thank everyone for joining the call. I highlight that the company is in great shape, both from a financial and operational standpoint. We are currently starting the harvest time, and all our teams are highly motivated to deliver strong results for our shareholders. So, I look forward to meeting you in our upcoming investor relations events. Thank you and have a great day.

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