Adecoagro SA (AGRO) 2015 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's fourth-quarter 2015 results conference call. Today with us we have Mr. Mariano Bosch, CEO; Mr. Charlie Bolero Hughes, CFO; and Mr. Hernano 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 the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Adecoagro and could cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Mariano Bosch, CEO. Mr. Bosch, you may begin your conference.

Good morning, everyone, and thank you for joining our call where we will present the Company's earning for the year 2015. As you will see in the presentation, we have achieved very good results, despite the fact that we are transitioning a low price cycling of the commodities we produce.

The excellent results obtained in this difficult environment is a direct consequence of the focus we have built in having a low cost of production, combined with a very [lucrative] strategy. Since our inception, we have only conceived our Company as becoming the lowest-cost producer of each commodity.

In addition, 2015 marked a milestone in the relatively short history of our Company. First, we completed the construction of the state-of-the-art sugar, ethanol, and energy cluster in Mato Grosso do Sul. This cluster has already started crushing in 2015 for the first time at full capacity.

And second, we became free cash flow positive as a result of not only the pending performance of the sugar, ethanol, and energy assets, but also the contribution of the rest of our business set. And our profound discipline towards obtaining efficiencies at all levels of our Company. This has definitely put the Company in an excellent position to take advantage of potential opportunities.

In a different token, Argentina's new government has made significant changes to agricultural policies that have positively impacted our margins and profitability. Namely the elimination of export taxes and export quotas for all agriculture commodities, except for soybean, which was reduced 5%, and more than 50% depreciation of the Argentine peso. Under this new macro economical and political scenario, the outlook for our businesses have improved substantially and most certainly will bring opportunities to continue growing and improving our results.

We are beginning a new year full of challenges and are excited about the prospects of the Company for the coming months. Our teams are fully motivated to execute the Company's strategy in the most efficient and sustainable manner, generating value 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.

Thank you, Mariano. Good morning, everyone. I would like to start on page 4 with a brief analysis on the range in Mato Grosso do Sul. As you can see on the chart, El Nino weather pattern transformed 2015 in the most rainy in the last decade.

On a full-year basis, grains reached 2,249 million tons in Mato Grosso do Sul, 40% higher than the 10-year average. On a quarterly basis, the fourth quarter was the most affected by excess of rains. In fact, it rained 46% more than the 10-year average and 62% more compared to the same period of last year. I would like to remind everyone that sugarcane cannot be harvested when the soil is wet, because the heavy combines and trucks may damage the sugarcane roots and the soil.

Let's look to page 5 to see the impact on our crushing activities. Excess rains during the quarter resulted in significant delays and disruptions in sugarcane harvesting and crushing. Sugarcane milling during the fourth quarter of 2015 reached 1.8 million tons, 22% lower year over year and lower than our expectations.

It is important to highlight that the sugarcane which was not harvested in the fourth quarter is scheduled to be harvested during the first quarter of 2016. In fact, as of today, we have harvested over 1.2 million tons of sugarcane during 2016. On a yearly basis, however, sugarcane milling in 2015 increased by 15% through even by higher sugarcane availability together with the higher milling efficiencies in all of our mills.

Let's now move to page 6, where I would like to highlight our agriculture productivity. As you can see on the top charts, our sugarcane yields in the fourth quarter reached 95 tons per hectare, 11% higher than last year. TRS was mainly affected by the abundant rains during the quarter and fell 5% to 127 kilowatt per ton of sugarcane.

As a result of these two factors, TRS per hectare increased 6% in the third quarter of 2015 compared to the fourth quarter of 2014. As you can see on the bottom charts, year-to-date productivity improvements are even more remarkable. TRS per hectare has increased 16% year over year.

As explained in previous quarters, these productivity gains are a result of our focus on improving our agricultural operations. Some examples of efficiency enhancements include effective implementation of pest controls, connection of specific cane varieties for the region, extension of the sugarcane growth cycle, and implementation of GPS-controlled sensors and combines, among others.

Turning to slide 7, now I would like to focus on sugar and ethanol production. As shown on the top charts, both sugar and ethanol production decreased during the quarter, driven by the fall in [shortened meeting]. As you may see in the bottom charts, sugar production reached 465,000 tons in 2015, marking a 12% increase over 2014.

Regarding ethanol, production stood at 361,000 cubic meters, 20% higher year over year. Measured in kilowatt equivalent, production increased 17% in 2015 compared to 2014. For the quarterly basis, production measured in TRS equivalent has decreased 25%, mainly explained by lower sugarcane milling.

Please turn to slide 8, where I would like to comment on cogeneration. On the top chart, you may see that exported energy -- or in other words, the energy which is sold to the grid -- increased by 25% on a year-to-date basis. The growth in cogeneration is explained by the increase in sugarcane milling, but most importantly by higher cogeneration deficiency.

As you may see in the bottom chart, cogeneration exports reached a record of 66 kilowatt hour per ton of sugarcane crushed in 2015, 8% higher than the previous year. It's worth noting that this represents one of the highest cogeneration ratios in the industry and we believe there is still upside for improvement.

Now let's turn to slide 9, where I would like to discuss our sugar sales. If you take a look at the graph on the left, you may see that our sugar sales volumes during 2015 totaled 598,000 tons, marking a 27% increase compared to 2014. As we already explained, this increase is directly correlated to the increasing TRS equivalent production due to the increase in sugarcane milling.

As you may see on the chart in the middle, the increase in volumes was partially offset by lower sugar prices. As a result of the global sugar surplus and weak sugar cycle, our realized sugar prices measured in dollar terms during 2015 were an average 20% lower than prices in 2014. This resulted in a 2% increase in total sales.

If you could please turn to slide 10, I will like to walk you through our strategy in ethanol carry. Due to production seasonality and the fact that mills are [working late] in ethanol production and setting up the produce in order to generate cash, (inaudible) ethanol prices traded at weak averages between May and August.

Prices reached their lowest level in August. During this month, we decided to minimize our sales volumes and start to fill up our ethanol tanks at our plant in Mato Grosso do Sul.

The yellow bar in the chart shows the growth in our ethanol stockpile. As you may see in the chart, ethanol prices began a very steep rally during October, driven by strong consumption growth, coupled with a 6% increase in gasoline prices announced by Petrobras on September 30. As a matter of fact, both hydrous and anhydrous ethanol prices increased by 55% and by 49%, respectively, in real terms. 32% and 28% in dollar terms for their lowest values, [where it stood] in August.

Let's move to page 11. As you may see in the left-side chart, ethanol sales volume increased by 111,000 cubic meters or 38%, driven by the growth in production. Nonetheless, as you may see in the chart in the middle, ethanol sales have increased by merely 7%. This is explained by a 22% decrease in realized ethanol prices during 2015 compared to 2014 as a result of the devaluation of the Brazilian real.

Now let's please turn to slide 12, where I would like to discuss energy sales. As you may see in the top left chart, energy spot prices throughout the year have fallen considerably compared to last year. In fact, as it can be seen in the table, average prices fell by 58% in real terms.

However, given the 47% depreciation of the Brazilian real, average prices measured in dollar terms fell by 71%. Its sharp decrease is mainly explained by the falling domestic demand due to the economic recession.

As you may see in the charts below, this has negatively affected our energy sales. In spite of 37% growth in volumes sold, net sales fell by 30%. However, it is worth noting that cogen cash margins remain over 80%. Therefore, the business continues to be an important contribution to both EBITDA and cash generation within the sugar, ethanol, and energy segment.

Let's move to slide 13. Financial performance during the fourth quarter was mainly affected by the normal crushing volumes. This is reflected in lower sales, adjusted EBITDA, and margins. On a full-year basis, the strong operational performance achieved during the year, such as a 15% increase in crushing volumes, a 16% increase agricultural productivity, a 25% increase in cogeneration ratio, etc., was largely offset by lower sugar, ethanol, and energy prices in dollar terms.

As a result, net sales remained virtually flat in the year, reaching $375 million and adjusted EBITDA grew marginally from $154 million in 2014 to $155 million in 2015. Nonetheless, we were able to expand our adjusted EBITDA margins to 42%, benefiting from further operational leverage, which has resulted in dilution of our fixed costs.

Let's turn to slide 14 with an overview of our sugar hedge position. As part of our risk and commercial strategy, we mitigate price volatility by hedging our costs in the derivatives markets. Despite the weak commodity price environment, our commercial team has been able to hedge prices above current market prices, protecting the Company's cash flows and margins.

We have a substantial part of our production still open to benefit from the recent sugar price rally. As of 2015 year end, we had 63% of our total 2016 and 2017 sugar production hedged at $0.137 per pound.

I would now like to move onto the farming business. Please direct your attention to slide 16, where we discuss our farming production. Planting activities related to the 2015 and 2016 harvest continued during the fourth quarter and early 2016.

As of the date of this report, we have completed our planting activities. A total of 210,755 hectares have been successfully seeded, 8% lower than the previous harvest. The reduction of planted area is explained by the sale of La Canada farm, lower leasing area, and lower double cropping as a result of crop rotation and margin optimization.

In terms of crop rotation, we have a reduced the soybean area and increased corn area by 20% as a result of higher expected margins resulting from the elimination of export quotas and taxes. Planting conditions for 2015 and 2016 harvest year have been adequate. On average, planting was done in a timely manner with very good humidity conditions through the initial growth phase of the crop. During December, we also completed the harvest of the wheat crop. Units per hectare reached 2.5 tons per hectare, 11% higher than the previous crop.

Let's move to page 17, where I would like to walk you through the financial performance of our farming and land transformation businesses. As you can see in the chart on the left, adjusted EBIT in the third quarter of 2015 reached $33.3 million, $49 million higher compared to the fourth quarter of 2014. This increase is explained primarily by first, a $10.7 million increase in changes in fair value in our crops segment, resulting primarily from higher wheat and corn gross margins, driven by an 11.2% increase in wheat yields and higher net prices for both crops as a result of the elimination of export taxes and elimination of export quotas in Argentina.

Secondly, a $24 million gain generated from the sale of farms in Argentina, which I will describe in detail in the next slide. And third, a $1.6 million gain from the mark-to-market of our [commodity] hedge position, which was $13.1 million higher than the fourth quarter of 2014.

On a full-year basis, adjusted EBIT was $63 million, implying a 19% decrease compared to 2014. This fall is mainly explained by lower commodity prices coupled with the appreciation of the Argentine peso in real terms being more for 2015, which has increased our cost of production in dollar terms. These effects were partially offset by higher productivity and positive hedge results.

Let's move to slide 18, where I would like to walk you through our land transformation business. In November and December of 2015, we sold La Canada the farm and sold our 49% interest in El Orden and La Carolina farms. These farms are located in the province of San Luis and Santa Fe, respectively.

In aggregate, we generated cash proceeds for $59 million and capital gains -- or adjusted EBITDA for $24 million. I would like to highlight that both farms were sold at a premium to Cushman & Wakefield's independent farmland appraisal of 57% and 48%, respectively.

As you may see in the chart on the bottom of the page, we have been consistently selling a portion of our fully developed land portfolio each year since 2006 and generating effective returns for our shareholders. In aggregate, we have generated cash proceeds for $328 million and capital gains for $209 million. Let's move to slide 19.

In 2015, we generated a $15.1 million gain related to the mark-to-market of our soybean, corn and wheat hedge positions. It's worth noting that half of these gains are already realized and captured in our P&L. As we can see in the top chart, as of December 31, 172,000 tons of soybean related to the 2015 and 2016 harvest were hedged at $10.04 per bushel.

The July futures contracts as of December 31 was trading at $8.77 per bushel, generating a mark-to-market gain. In the case of corn, we hedged 98,000 tons of corn at $4.53 per bushel. As of December 31, the July futures contracts of corn was priced at $3.70 per bushel. Therefore, we generated a mark-to-market gain.

Let's now turn to page 21, which shows the evolution of our Adecoagro consolidated operational and financial performance. On a consolidated basis, net sales decreased year over year from $694 million in 2014 to $649 million in 2015. Adjusted EBITDA decreased from $216 million in 2014 to $203 million in 2015. Regarding revenues and EBITDA is explained by lower prices in dollar terms for most of the commodities we produce, higher production costs in the farming business due to the appreciation of the Argentine peso in real terms, and a decrease in shortened meeting through the last quarter due to the excess rainfalls.

Let's move the slide 22. As you may see in the top chart, prices for most of the commodities we produce have fallen between 18% to 25% in 2015 compared to 2014. Despite the weaker commodity environment, I would like to highlight that we've been able to keep our EBITDA margin stable. This is a direct result of our strategy of being low cost producers for each of the commodities we produce and our focus on operational efficiency.

In addition, our geographic and product diversification allows us to mitigate yield and price volatility, providing stable cash flows and margins. Furthermore, as you may see in the chart below, in spite of very high commodity price volatility over the last five years, these factors have allowed Adecoagro to retain relatively stable margins, ranging between 25% and 31%. This strategy will allow Adecoagro to generate positive cash flows and stable margins throughout commodity cycles.

Please go to page 23. In total free cash flow generation, the fourth quarter of 2015 marked a milestone for our Company. Following an aggressive growth cycle that commenced in 2008 and was completed in mid-2015, we generated a record of $85.2 million of free cash flow before changes in net borrowings during the quarter.

We expect the cash flow to become positive during 2016 on a full-year basis and to continue growing over the upcoming years, driven by the [deterioration] of full crushing capacity in our sugar mills, the recent policy changes in Argentina as described above, the rebound in sugar and ethanol prices, enhancement of operational efficiencies, and the devaluation of the Argentine peso and the Brazilian real, among others.

Finally, please turn your attention to page 24. As you may see on the top left chart, our gross investments as of December 31, 2015, stands at $723 million, while net debt stands at $524 million. I would like to highlight that our net debt has decreased by $60 million compared to the first quarter of 2015, primarily as a result of the positive free cash flow generated during the fourth quarter of 2015, which was used to start the deleveraging process. I would like to mention that 67% of our debt remains in the long term, including multilateral banks such as the BNDES and IDB at very competitive rates, as you can see on the bottom left chart.

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

(Operator Instructions) Jose [Rosardo], BTG.

Thank you for taking my question. I have two questions, and both are related to your sugar and ethanol business. So the rainfall during the fourth quarter postpone a relevant part of our cane crushing. So my first question would be if you could give us an update about our cane crush stats as of the first month of 2016.

Also, the first months of the year are usually the inter-crop maintenance period. So I would like to know if the fact that you are crushing the cane into January and likely February, does that have any side effects for the next crop and for the maintenance period. Thank you.

Thank you, Jose, for your question. I would like to ask Renato Pereira, our head of the sugar and ethanol business, to answer your question. And then I can complement. Renato?

Hi, thanks for your questions. Due to the weather pattern in our region, we have a dryer period in the traditional season and a wetter weather in a traditional season. Therefore, we have a good condition to crush sugarcane during the first quarter and plenty of time to do our inducer maintenance throughout the year.

As a consequence of this rainfall pattern, the TRS difference from the very beginning and very end of the year to the peak of the season is much lower, allowing us to crush better sugarcane in the first quarter. As Charlie mentioned, as of today, we have already crushed 1.2 ton of sugarcane. Our use is close to 110 tons per hectare and the TRS content is around 107 kilograms per ton.

Rodrigo Mugaburu, Morgan Stanley.

I have two questions. One: if you have any -- can tell us something about what you're going to do with the cash of the farm sales in Argentina.

And then the other question is looking at the cane yields last year were up 15% year on year. That's 100% of the ag due to the ag practices or given El Nino, that also helped to increase the cane yield. Bottom line, my question is can we use -- assuming no more weather for next year, same kind of yields for the sugarcane for the upcoming season? Thanks.

Thank you for your question. I will answer first your second question that is regarding the cane yields. I think that the cane yields have improved because of the two reasons. Because of all the operational improvements and also because of the rains that are giving us better cane. So I would say that is complementary and both things are making these results. So I not assume forever this [inside] chart taking that we are having right now.

Then on the first part of your question regarding what is it that we are going to do with the cash generated by the farm sales in Argentina, now we have a very important change in Argentina and now cash is functional. So we can use the cash from one country to the other and that is a huge change that happened for us.

So overall, the cash -- we think the same way, and as we always answer this question on how we -- or what is it that we are going to be doing with the cash. The answer is we are looking for growth projects, but we are very disciplined on the return on investment that we need for each one of these projects.

So in each one of our business lines in our sugar and ethanol in the farming business, we are looking for growth projects. And whenever the return on investment is achieved, we will execute. So that is one of the things that we are looking to do with the cash. And then we can also reduce our debt levels and we can also distribute the capital to our shareholders. So the three things can be done with the cash tax that we will be generating.

Thanks, Mariano. And if I may, another question on the dairy business. You posted very strong operational results on the business. The economic situation in Argentina kind of did not allow to have strong economic results.

Do you think -- what is your view on the recent efforts from the Argentine government to improve the profitability of the [separate]? Are you optimistic that anything that is being done or discussed is going to help the economics of the business? And are you optimistic that that could happen this year or it's going to take a little more time, in your view?

Thank you, Rodrigo. The international situation of the dairy business is a very difficult situation. As we always mention, we are the low cost producers in each one of these sale commodities. And so even though we are having such difficulties in the dairy business in general, we are still making money. But it is clear that we are going through the most difficult situation in terms of the dairy business in general.

And particularly in Argentina, we are optimistic that they are taking care and they will find a way on how to solve this political situation in Argentina. We are still making money. We are still in a reasonable situation compared to most of the industry that is really suffering. So that's why we are optimistic that this message will help to develop the industry.

Great. Thanks a lot.

(Operator Instructions) Fernando Suarez, Raymond James.

I was wondering if you can give us some color regarding the low land that prevents you from buying additional land in Argentina. Thanks.

Okay. Thank you, Fernando, for your question. Sure. This current administration in Argentina is focused on promoting investments in Argentina, and that is clear. As part of this idea, they are revising this foreign ownership legislation.

So as an example, I can mention that we were in an investor meeting with the Secretary of Agriculture and he pointed out specifically that they are revising this, that this is a priority for them, and that they are working with the governors of the different provinces in order to modify or adjust this land ownership law.

Okay. And do you think that current prices will meet your IRR return?

Okay. Depending on -- we believe that the prices of the land are a consequence of the cash yields of that land. That's why, particularly in Argentina, we think that the cash yields have improved and are improving with this new scenario. So we believe that prices of land should continue to increase as a general idea. So that is the general concept.

Then specifically of the different projects that we are analyzing, there is always a huge gap between the bid/ask prices, and there are certain prices at which we can achieve the return that we are looking for. So it will depend on the specific opportunity of each one of the things that we are analyzing today in the different places of the region.

Okay, great. Thanks.

(Operator Instructions) Victor [Sarajiaro], Credit Suisse.

Thanks for taking my question. Just want to understand how the Company sees a consolidation in the sugar and ethanol sector. I imagine that you have received many offers. I just want to know if you see this move, or valuation still doesn't make sense.

Thank you, Victor, for your question. We see the sector of course going through many difficulties, but again, we think that the important thing here is to be within the low cost producers of sugar, ethanol, and energy. And in the combination of the three.

So we see attractive assets, when these assets are capable of being the low cost producers of these three commodities, so there's combination of soil and climate and availability [obtain] in order to be able to comply with this essence of the [characterization]. Then as in particular, we feel we are in a very good situation that we are obtaining our results that we outlined in the past. And that our cluster is really within the second set of being the low cost producer.

Are there opportunities? Yes, there are many available. Not all of them we think are opportunities, but there may be some specific cases where we've can comply with our targeted returns and where we can continue to be the low cost producer. So if these two characteristics happen, we may be able to grow. And I think where our team is very committed and is very well positioned to continue on.

Very clear. Thank you.

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

So before ending the call, I would like to thank you all for joining and [rated] our commitment to obtain the maximum return for our shareholders in a responsible and sustainable manner.

We are aware of the difficult scenarios the world is going through. Nevertheless, in the region and in particular in Argentina is showing clear signs of recovery on our sector. And we are confident that we shall take advantage of such favorable environment and continue generating value. So look forward to seeing you in our upcoming IR event. Thank you again.

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