Adecoagro SA (AGRO) 2015 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro's First Quarter 2015 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 listen-only mode during the Company's presentation. After the Company's remarks are completed, there will be a question-and-answer session. (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 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'll 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. In our Sugar, Ethanol and Energy business, we had a very good start of the harvest. Although the first quarter is not [brilliant] in terms of earnings, I would like to highlight a few points that demonstrate the consolidation of our operations and the outlook for the year.

First of all, we have been able to accelerate the start of the harvest. Our cluster began operations 25 days earlier than last year. This strategy would allow us to have a longer harvest season, which would result in a more efficient use of our fixed asset and dilute our costs. Accelerating the harvest was only possible by being very efficient in all the inter-harvest maintenance works, performed at the mean. And most importantly by having sufficient availability of sugarcane plant, which brings me to the second point I would like to highlight. Our sugarcane transactions is in very good conditions. Al of the improvements and enhancements we have been making in our agriculture elaborations are starting to transform into higher productivity. Yields per hectare and TRS continued increasing year-after-year. The third point is that, despite the low commodity strategy we are in, we continue generating positive margins. This is the result of our competitive cost structure, which is driven by the fact we have one of the highest [cotton breeds] in the industry. We pay very competitive leases rates compared to Sao Paulo and will produce 95% of the sugarcane that is supplied to our mills with high productivity.

In addition, I would like to highlight that our commercial and financial teams have been able to develop efficient siding strategies that have increased our pricing and profitability. Some examples are, the ethanol carry strategy, we did last year and our sugar hedge of $15.7 per pound.

In summary, although we have just started the 2015, 2016 harvest and there are still many challenges and risks ahead, we are very well positioned to have a great year.

Regarding the Farming & Land Transformation business, we hare harvesting very good yields in our main crops and that helps to compensate the lower commodity cycle we are experiencing. Lastly, I would like to highlight that with the completion of Ivinhema mill, we have essentially finalized our existing growth plan. As of today and assuming no additional growth commitment, we expect to see a slowdown in capital expenditures during 2015 and 2016. So, as you can see, we remain fully focused in execution and efficiency gains to be their low cost producers in each of our commodities. And that generate attractive cash flow and returns for our shareholders.

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

Good morning everyone, and thank you for joining Adecoagro's earnings call for the first quarter of 2015. I would like to walk you through our few slides that reflect the main operational and financial highlights of the quarter. Let's start on page four, where I would like to highlight, weather conditions in our cluster in Mato Grosso Do Sul. I would like to remind you that the first quarter is the summer season in Brazil. The high temperatures and abundant rainfalls during summer are a key component in the development and growth of sugar cane. As you may see in the chart, rainfalls during January to March have been essentially in line with the historical average. Our trading condition has developed as expected.

Moving on to the next slide, we will focus on sugarcane crushing. Our mills have been able to accelerate the start of the harvest season compared to previous years. The Angelica mill become crushing on March 11, 15 days ahead of the previous season and Ivinhema mill began on March 16, 40 days earlier than last year. As a result, we are able to crush 460,000 tons of sugarcane, almost 10 times more than first quarter of 2014, anticipating the start of the harvest, in part of whole strategy to extending the harvest season, the highly mechanized industry where over 85% of total costs are fixed, this strategy would allow us to increase sugarcane crushing and production during the year, including fixed costs and enhancing margins.

Looking factors that contributed to the early start of the harvest are, first, our operational teams were able to minimize the time required for the inter-harvest maintenance of industrial and agricultural equipment. And second, but most important, the expansion of our sugarcane plantation over the last couple of years have supplied sufficient cane to allow a longer milling season.

Let's move to page six to analyze this. As you can see on the left-hand chart, our sugarcane plantation has been consistently growing year after year at an average growth rate above 20%. We currently have 126,000 hectares of sugarcane. We're very close of reaching a stabilized plantation size, which will allow us to supply our 10 million tons of nominal crushing capacity. This explains why sugarcane planting has slowed down in the first quarter of 2015 compared to the previous year, as you can see on the chart on the right.

I would like to shift your attention to page seven where I would like to highlight a few sugarcane productivity metrics. Over the last couple of years, we are focused on training and strengthening our agricultural team and improving our agricultural efficiency. Some specific areas we had focused on with very good results include; first, the effective implementation of pest controls; second, selecting the best sugarcane varieties for the region in terms of yield and TRS potential; third, allowing sugarcane to reach its optimum growth before harvest, or in other words, not harvesting sugarcane with less than 12 months of growth; and fourth, replanting sugarcane each year to renew and maintain the productivity of our plantation. These improvements, among others, coupled with favorable weather, are responsible for our 41% increase in yields and a 15% increase in TRS, which have resulted in a 62% increase in TRS per hectare in the first quarter of 2015.

Let's move to slide eight. Sugar and ethanol output boosted during the quarter, driven by the increase in sugarcane milling and the higher TRS. As you can see in the bottom left chart, measured in tons of TRS, production grew from 3,500 tons to 51,400 tons. In the case of energy, production increased by a moderate 13%, significantly lower than the increase in millings. This is explained by two main factors. Firstly, the fact that in the first quarter of 2014, we generated a large amount of energy by burning the stockpile of the gas, which was left over from 2013. And secondly, in the current quarter, we suffered delays in start of some of our generators in Angelica and Ivinhema mills. Therefore, our generation per ton of sugarcane was lower than expected. Nonetheless, it is important to highlight that the bagasse that was not burned during this quarter, are the result of delays, sits in our inventory and will be burned and transformed into energy throughout the year.

Let's now turn to page nine, where I would like to comment on ethanol sales. The 37% growth in ethanol sales volumes during the quarter was related to the ethanol carry strategy we implemented during mid-2014. As you may see in the top chart, ethanol prices reached the lowest annual level between August and October of 2014, which is coincidental with the peak of the sugarcane harvest. Hydrous ethanol prices crated below BRL1,200 per cubic meter. At that time, we decided to reduce our monthly sales volumes on starting to storing ethanol in our storage tanks of the mill, in order to capture higher prices during the inter-harvest season. As a result by the end of 2014, we have ethanol inventories of 7,000 cubic meters to 6,000 cubic meters. As you may see in the price curves, ethanol prices increased during the year and continued increasing during January and February 2015, reaching a high of BRL1,380 per cubic meter. This strategy allowed us to capture in average 15% higher prices in the inter-harvest season, compared to the mid 2014 where we started the carry, increasing our margins and return on this capital. Year-over-year net sales grew by only 8%. The growth in volumes was offset by lower prices. Compared to the first quarter of 2014 prices in the current quarter were 4.6% lower in reals and 21.1% lower in US dollars.

Now let's please turn to slide 10, where I would like to discuss Energy sales. As you may see in the top left chart, hydroelectric power in Brazil continues to soften from the level of water. Water levels at reservoirs remain at 5-year lows. Despite this situation on November, the 25th of 2014, the Brazilian National Energy Agency decided to lower the ceiling price of energy from BRL822 per megawatt hour to BRL388 per megawatt hour. Spot energy prices during the quarter, traded at the priced cap. Therefore, as you may see in the charts below, despite a 13% growth in volumes, our net sales fell by 46%, our realized prices decreased by 52% from $201 per megawatt hour to $97 per megawatt hour. This reduction is primarily explained by the depreciation of the real coupled with our lower price for spot sales. I would like to remind you that 70% of our energy exports in 2015 are hedged in long and short-term contracts at BRL262 per megawatt and only 30% is sold in the spot market.

Finally to conclude with the Sugar, Ethanol, and Energy business, I would like to focus on slide 11. Here, we can see the overall financial performance of the Sugar, Ethanol and Energy business. Total net sales during the quarter reached $50.5 million, 4% higher than the same period of 2014. As explained during the previous slides, the growth in volumes was mostly offset by lower prices. Adjusted EBITDA increased significantly during the quarter from $3.8 million in the first quarter of 2014 to $17.9 million in the first quarter of 2015. Adjusted EBITDA margins expanded from 7% to 36%. Adjusted EBITDA growth is explained by, first, the ethanol carry strategy; second, an accelerated start of the milling season; third, higher agricultural productivity; and the last but not least, a $12.3 million gain from our Sugar derivative hedge position.

Let's move to slide 12 where I would like to explain this hedging gain. As of March 31, 2015, we had 362,000 tons of sugar, 2015 hedge at $15.7 per pound of sugar equivalent. Due to a contract from the same time, we're trading at $13.5 per pound. Therefore, the mark-to-market of the position generated an unrealistic gain of $12.3 million.

I would like to shift your attention to page 14 where I'd like to comment on weather conditions during the current harvest season. The chart shows the monthly average rainfall evolution for our farms located in the Humid Pampas region of Argentina, which is our core production area. As you may see, both rain levels and rain distribution were in line with the historical average. The critical growth period for a crop is during the flowering period where the water requirements peak. Soil and humidity levels were at good during the flowering of early corn, soybean and late corn enhancing crop development and growth.

On page 15, we can see the harvest of our crops is well advanced for soybean and recently starting for corn. Harvested soybean and corn yields are currently 6% and 3% above in the previous season. We expect yields to stay at similar levels as we continue harvesting the remaining areas. Because of rice the harvest is essentially complete, yields have underperformed compared to the previous harvest and are below our expectations. The 7% decrease is explained primary by excess rains and cloudy days in the Northeast of Argentina which hampered the development and growth of rice plants.

Let's move to page 16, where I would like to walk you through the financial performance of our Farming business. Despite higher productivity and volumes in most of our segments, consolidated EBIT decreased by 37% primarily driven by the falling commodity prices. In addition, the rising inflation in Argentina has more than offset the nominal depreciation of the Argentine peso resulting in non appreciation of the currency in real terms which is increasing our costs, measured in dollars and putting pressure on our margins. In the case of crops, adjusted EBIT has decreased by 28% to $14.8 million. The reduction is primarily explained by the lower soy, corn, and wheat prices and higher costs in dollar terms, partially offset by higher yields and positive results from our commodity hedging position. Regarding rice business, the 57% fall in adjusted EBIT is also explained by the combination of one, lower yields and two, higher costs in dollar terms, driven by the appreciation of the Argentine peso in real terms.

In the case of the Dairy business, our operational performance during the quarter was very good and we continue to see improvements as we consolidate the free-stall facilities. Milk production volumes increased 5% year-over-year, driven by a 2.8% increase in productivity and a 2.2% growth in our dairy cow herd. The gains from productivity were offset by high costs measured in dollar terms, resulting in a 7% decrease in adjusted EBIT.

Let's turn to page 17. As previously noted; the falling commodity prices were partially reversed by the gains resulted from the mark-to-market of our hedge position. As we can see in charts below, 99% of our 2014-2015 soybean production is hedged at $11.57 per bushel. Current market prices for the July futures contracts are below $10. In the case of corn, approximately 98% of our 2014-2015 production hedged at $5.30 per bushel, significantly higher than current prices for the July future contracts. As explained in the previous slides and the mark-to-market of the derivatives and hedge positions generated an $8.8 million during the quarter.

Let's now turn to page 19 which shows the evolution of Adecoagro's cost related operational and financial performance. On a consolidated basis, net sales increased year-over from $95 million in the first quarter of 2014 to $109 million in the first quarter of 2015. This 16% increase is explained primarily by higher sales from last year inventory despite lower market prices across most of our products. Adjusted EBITDA in the first quarter of 2015 totaled $35.8 million, representing a 3.3% increase compared to the first quarter of 2014. Improvement in financial performance was primarily driven by our Sugar, Ethanol and Energy business as explained throughout the presentation. We expect Adecoagro's production volumes and financial performance to continue growing in line with historical growth, mainly driven by the consolidation of our sugarcane cluster and an increase in operational and financial efficiencies in each of our businesses.

Let's move onto page 20. As you see on the top left chart, our gross indebtedness as of March 31 of 2015 stands at $778 million and net debt stand at $580 million. Net debt is slightly lower compared to December of 2014 and 7% higher compared to March 2014. The year-over-year increase in net debt is explained by the cash deployed for the construction of the Ivinhema mill. I'd like to highlight that 75% of our debt is in the long term composed mainly of loans from multilateral banks such as the BNDES and the Inter-American Development Bank at a very competitive rates.

Finally, let's move to page 21, where I would like to comment on CapEx. As anticipated in our fourth quarter 2014 conference call, total CapEx is expected to slow down during 2015, driven by the completion of the Ivinhema mill and the consolidation of our sugarcane cluster in Mato Grosso do Sul. We can already see the downward trend reflected in the current quarter. Capital expenditures during the first quarter of 2015 reached $63 million, 54% lower than the same period of 2014. As of today, no major growth project has been committed for 2016 and forward. Therefore, we expect CapEx to consist primarily on maintenance related to the Sugar and Ethanol business. This includes the planting of sugarcane to renew our plantations and the inter-harvest maintenance of building and agriculture equipment. We expect CapEx to range between $150 million and $170 million in 2015, and between $80 million to $90 million in 2016. Combination of decreasing CapEx and increasing cash generation will allow Adecoagro to start generating attractive levels of free cash flow, starting in 2016.

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

Thank you. The floor is now open for questions. (Operator Instructions) Rodrigo Mugaburu, Morgan Stanley.

I have two questions on Argentina. First, there seems to be a debate on currently farmers are going to plant more wheat expecting some changes on the tax structure by year-end. Specifically, what Adecoagro is going to do? Are you thinking an increasing planted area of wheat betting on that change?

And then the second question is related to the yields. Bolsa de Cereales de Rosario, they're expecting roughly a 9% increase on yields year-over-year for soybeans and 7% for corn. The bottom line question is, can we expect a little bit more upside yields on Adeco above the 6% that we saw for soybeans?

Hi Rodrigo, this is Mariano. How are you? Regarding the first part of your question of whether we are betting on planting the wheat according to changes, the answer is, no. We do have a plan to plant wheat that is in line with what we've been doing in the past years. And as we've always mentioned, the priority for us when we are designing our planting plan is the long-term rotation, and we take that into account on top of the -- I think so we have this long term deal for our sites and we consider it is important to continue planting wheat, so that's why we've seen a decrease in planting off wheat last year. And so this year, we will continue with similar of what will you've seen in the past for Adecoagro. So that's according to wheat.

And then regarding the second part of the question, whether there is been still more potential for improvement on our yield, if we analyze of what we are seeing today on what we have harvested, there is still more room and if we continue to have a good harvest timing and we don't have any excessive rains or any problem at the harvest, we should still see a little bit more of improvement on the potential yields that we are harvesting today.

Isabella Simonato, Bank of America Merrill Lynch.

Thank you for your time. I have a question regarding leverage based on the CapEx expectations that you guys have for 2015 and 2016. What is the target leverage that you see by the end of this year, by the end of 2016?

I'm going to ask Charlie to answer your question. Charlie?

Actually, we're expecting to maintain our net debt EBITDA ratio as of the end of the December of this year. That's the one that we had at the beginning.

And for next year, given that free cash flow generation should be much higher?

That's a good question. As you may know in 2016, we will be generating very good cash flow considering that we have finished our CapEx plan for this year. So we are expecting to reduce the net debt EBITDA ratio to a level that would be in the range of two times net debt EBITDA.

(Operator Instructions). Ravi Jain, HSBC.

So the first question was mainly on the Argentine, let's say, potential changes in the regulation, what is your expectation after the election in the second half as to what are the potential positive moves that we could see in the agribusiness sector in Argentina? That's my first question.

And secondly just following up on the FCF question, given that you will have positive free cash flow going forward in the next couple of years, have you given thought on what are the other strategies for your growth operations, whether it's in sugar-ethanol or whether it's in farming? What are the potentially opportunities that you are exploring?

Thank you for your questions. First, regarding the Argentine policies and potential changes, we all hear what the different, that candidates to run the country are saying today, and what we see is that they all acknowledge the importance of the factor in the economy. And so all what we shared so far from them is very positive for the sector and some of them are even more clear saying that, they will reduce the export growth and the export taxes and so all that would be extremely positive or our business of course. So that is regarding the potential changes there for Argentina.

And then regarding your question on how do we see or how do we expect the growth regarding the positive free cash flow that we will be generating, again as we've been talking before or saying before, we are always focused on the return on investment, so we will be very disciplined as we've been in the past on analyzing which are the best returns that we can see. So within the Sugar, Ethanol & Energy business, there are some opportunities that we've been analyzing and we still look at them and we'll see whether their returns are attractive enough in order to do a little bit more of that, the same thing for the rising Argentina or the daily business. So there are opportunities, but we will need to be very disciplined on our analysis of the return on investment.

One quick follow-up on that point. So in case the opportunities, especially in the sugar-ethanol space do not come up to your return on investments, should we then expect maybe the extent of dividend to be raised, if you don't find the right opportunities? Does that make sense?

Yes, of course. Within the analysis that we are always doing on this disciplined analysis of the return on investment giving back the money to the shareholders is [aster native, that is always] in the analysis through the [EVMs] through the most efficient way that we can do it.

(Operator Instructions) Viccenzo Paternostro, Credit Suisse.

My first question is on land market in Argentina. I appreciate if you comment on how is the market in terms of liquidity and land price given this environment of lower grain prices. So, that's my first question. And my second question is on sugar price. We have seen sugar price under pressure in the past two years and my question is when do you expect sugar price to start recovering and what serve you for long-term price.

On your first question regarding prices of land, we've been always understanding prices of land being related or strongly correlated to the DCF of that land. So, with lower commodity prices in general, if margins are lower, prices of land should be lower and that's how we analyze always the prices of land. So, that's why we are saying that the prices of land in Uruguay and Brazil, mainly are higher than what we consider should be according to the cash flow generation and prices of Argentina haven't gone that up after they've grown all over the region including Uruguay, Paraguay, even Bolivia and Brazil.

So -- and cash flow generation when we compare within the different countries, are someway higher regarding -- according to the prices. So with this level, we don't see them increasing, but we see more potential in Argentina than in the other countries in the region. So that would be our view.

And regarding liquidity that you were also asking, in general, this is a market that land -- farm sales or farm which is a -- we say a relatively illiquid market. So that's why we always -- we've been always seen these as something relatively illiquid. And this also, we've got the opportunity to take advantage, either on buying or selling of this potential liquidity. So that is the answer of the question regarding land prices.

Then I'm going to ask Marcelo Sanchez, our Commercial Director to answer your question regarding the sugar prices and our view there. Marcelo?

What we are seeing of course, your remarks on the sugar price under pressure within the last 2 years, that is has not been -- for us. We've been expecting that from the prior session to see in our hedges position. Even though we don't see the prices recovering shortly, we expect prices to move on a positive scenario for second half of next year.

(Operator Instructions). Rodrigo Mugaburu, Morgan Stanley.

A question on rice, you mentioned on your release that you do see upside potential for the US when all the land transformation stabilize. So in the mid long term, what is your target or what can assume in terms of tons per hectare for rice?

We had this particular year a rainy summer, a rainy summer means lower rains or was not a very good year for rice yields. But I think, it was a very good year for soya and corn. So this is a particular year in the rice yields that are -- that had been affected by weather. But we now reached an -- within all this adjustments or improvements of efficiencies that we're doing, we can expect or we target the yield, that to be between 6.0 tons and 6.5 tons per hectare in the relatively short future. As you've heard, we've been doing a lot of improvements on our zero-leveling and all these improvements on the farming system.

Thank you. This concludes our question-and-answer session. At this time, I'd like to turn the floor back to Mr. Bosch for any closing remarks.

So thank you everyone for joining the call. We have a very important year ahead of us, and we continue to focus on execution and improving efficiencies in all our commodities to be the lowest cost producers for each one of these commodities. So thank you for joining us today and have a good day.

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