Adecoagro SA (AGRO) 2016 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 2016 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. (Operator Instructions)

Before proceeding, let me mention the 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 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 Adecoagro 2016 first-quarter results conference. As you may have seen in our report, we had a very good quarter in all our businesses.

In the Farming and Land Transformation business, we have important things happening, such as the change in Argentina (inaudible) public policies, in particular the elimination of export taxes for corn, wheat and rice and the reduction in soybeans. The devaluation of the Argentine currency, which made us more competitive and improved our cost structure. In the operational side, as you have heard [in several locations] before, we are very disciplined to continue improving our efficiencies year after year. And as an example, our milking cows are delivering more than 36 liters a day. Then we have been able to have 100% of our rice production with better use compared to last year, just before heavy rains started in the northern areas of Argentina. And we are taking advantage of the coordinated work between harvest logistics and commercial teams to maximize the sale of our production of corn and soybeans after the heavy rains.

All these will continue to enhance our financial results for this business.

On the Sugar, Ethanol & Energy business, as anticipated, we have implemented the nonstop or continuous harvest. This new development will substantially increase our production and dilute our fixed costs, making a significant contribution with our obsession of becoming the low cost producers for sugar, ethanol and energy. As of the end of the first quarter, we have already milled 1.5 million tons of sugar cane. That's three [times] more when compared to last year.

In addition, we have finalized the investment cycle and become cash flow positive by the end of 2015. And on top of that, sugar prices are recovering.

All of the above makes us very optimistic on our near future. And at the same time, we continue looking for growing opportunities in all our business lines.

That brings additional value to the Company and attractive returns to our shareholders.

Now I will let Charlie walk you through the numbers of the quarter.

Thank you, Mariano, and good morning, everyone. I would like to start on page 3 by briefly explaining the amendments to the biological asset accounting and walk you through the main implications regarding our financial statements.

In June 2014, the International Accounting Standards Board amended IAS 41, which relates to the accounting treatment of biological assets. The new standard determines that bearer plants should be accounted for in the same way as property, plant and equipment. They will therefore now be accounted for under IAS 16. The produce growing on bearer plants will continue to be measured at fair value, less cost to sell.

[Adecoagro's sugar plantations] qualify as both bearer plants and agricultural produce, in the following way. The sugarcane roots, which will grow, produce over multiple harvest, will be classified as property, plant and equipment and measured at amortized costs depreciated over six years. The sugarcane currently growing on the field, which will be cut during the next harvest, will be treated as agricultural produce and measured at fair value, less selling costs.

This new standard will have two main impacts on our income statement. First, the depreciation of sugarcane, calculated as 1/6 of the capital, less cost of planting, will form part of our cost of production reflected in the line item Cost of Manufactured Products, and impacts our net income.

Second, instead of measuring the fair value of sugarcane by calculating the net present value of all future harvests, as we are doing [until] now, going forward we will only calculate the net present value of the next harvest; in other words, the unharvested sugarcane growing on the fields. Any difference between the fair value at the end of the period and the fair value at the beginning of the period, net of sugarcane maintenance costs related to each period, will impact our income statement in the line item, Changes in Fair Value of Biological Assets.

In light of these changes, we have decided to simplify our definition of adjusted EBITDA. Under the previous accounting standard, our adjusted EBITDA calculation eliminated any gains or losses from changes in fair value of long-term biological assets. Under the new accounting standard, we will no longer eliminate the gains or losses from changes in fair value of sugarcane biological assets, since this only represents the net asset value of sugarcane currently growing on the fields.

We believe this new definition of adjusted EBITDA not only simplifies the calculation of adjusted EBITDA but also treats sugarcane with the same criteria as we treat soybean or corn. We believe this metric adds transparency and reduces volatility for investors, as we are able to anticipate any positive or negative impacts on our production and margins.

On the chart on the bottom of the page, you may find the impact of these changes. Adjusted EBITDA for 2015 under the new standard has increased by $5.7 million, which is explained by the net present value of the unharvested sugarcane standing on the fields as of December 31 of 2015. In the case of net income, since the new accounting standard does not consider the fair value of the sugarcane root or, in other words, the net present value of what we will be harvesting between the next two and six years, and its income has decreased by $23 million.

Please now turn to page 5, where I would like to explain the nonstop or continuous harvest model, which we have implemented in our cluster Mato Grosso do Sul since the beginning of the current harvest season. The weather pattern in Mato Grosso do Sul, where our cluster is located, is less seasonal than in Sao Paulo. Our summer is drier and our winter is more humid than traditional sugarcane regions in the center/south of Brazil.

As a consequence of this weather pattern, as you may see in the chart, the sugar content gap between the beginning and the end of the year compared to the peak of the harvest is much smaller than Sao Paulo. The (inaudible) growth is much more flat. This allows us to grow and harvest sugarcane year round with a minimal impact on sugar content.

Since the beginning of the 2016 and 2017 harvest year, we implemented a nonstop or continuous harvest. This means that we will harvest and crush sugarcane year round without stopping during the traditional off-season. This new strategy will allow us to increase annual sugarcane milling and sugar ethanol and energy production by approximately 10%.

Another benefit of the system is that we will be producing ethanol in the off-season, when market prices usually have a high premium to prices at harvest. In addition, cogeneration efficiency is related to harvested volumes and unrelated to TRS, enabling us to utilize our cogeneration potential during the whole year.

Considering that approximately 85% of total costs are fixed, this model will result not only in higher revenues but also in the dilution of our fixed costs. The continuous harvest is part of our strategy of increasing our overall connectivity and enhancing our return on invested capital. We believe this model will allow us to remain one of the lowest-cost producers of sugar, ethanol and energy in Brazil. The implementation and execution of this model was only possible after reaching operating standards and strong correlation between our agricultural and industrial teams.

Let's move to the next slide to see the impact of this new model on our operations. As a result of the continuous harvest model, our mills operated during the whole quarter. As you may see in the chart, we crushed 533,000 tons in January, 333,000 tons in February and 637,000 tons in March. On an aggregate basis we crushed a total of 1.5 million tons of sugarcane in the first quarter of 2016, 227% higher than last year.

On page 7, I would like to walk you through our agricultural productivity metrics. Our operational teams continue fully focused on our agricultural operations. As we have explained before, sugarcane production represents over 70% of total cost of goods sold. Therefore, being an efficient producer of sugarcane is a key driver behind our low-cost strategy. We continue working on training and strengthening our operational teams, improving our logistics and enhancing our efficiency.

As you may see on the chart, sugarcane yields per hectare have increased by 13% while, as expected, sugar content or TRS per ton of cane fell by 8%. Overall, TRS measured per hectare reached approximately 11,000 kilograms, 4% above the previous year.

Let's move to slide 8 to see the growth in production. (technical difficulty) ethanol output boosted during the quarter, driven by the increased sugarcane milling and the focus in growth in TRS per hectare. As you may see in the bottom left chart, measured in tons of TRS, production grew from 51.5 thousand tons to 166.4 thousand. This implies an increase of 223%. In the case of energy, production increased by 280%. Nonetheless, a large portion of the bagasse we produced during the quarter was not burned and is being carried forward to the second quarter in order to capture higher electricity prices.

This explains why the cogen ratio, which measures energy sold per ton of sugarcane crushed, was only 45 kilowatt hour per ton, despite this ratio was 16% higher year-over-year, it is significantly lower than our focus for the full year.

Let's now turn to page 9, where I would like to comment on sugar and ethanol sales. As you may see on the top of chart, sugar net sales grew by 102% despite a 30% decline in sugar prices. The increase was driven by significantly higher (inaudible) volume as a result of the growth in production and the strong sugar carry executed at the end of 2015.

Regarding ethanol, net sales increased by 11%. Sales growth was driven by a 10% increase in realized ethanol prices in dollar terms and a 6% increase in volume. Volume growth year over year does not reflect higher production volume of this quarter because sales in the first quarter of 2015 reflect a large ethanol carry executed in December of 2014.

Now let's please turn to slide 10 where I would like to discuss energy sales. As you may see in the two charts on the top of the slide, energy prices in the first quarter are significantly lower than last year and have traded at an average of BRL35 per megawatt hour. This is explained by high rains, which have increased hydropower supply, coupled with a reduction in demand as a result of the economic recession.

Measured in dollar terms, energy prices year over year decreased by [64%]. Nonetheless, our net sales increased by 40%, driven by the growth in production. It is important to highlight that over 75% of our annual energy exports are already being contracted in options at prices around BRL220 per megawatt hour. These contracts are scheduled to be delivered between April and December. Therefore, the energy sold during the first quarter was mostly sold in the spot market.

As a result, and as I explained earlier, we kept cogeneration volumes during the first quarter at minimum levels. Therefore, we have a large stockpile of the gas which we will be burning during the upcoming months to capture higher prices.

Finally, to conclude with the Sugar, Ethanol & Energy business, I would like to focus on slide 11. Here we can see the overall financial performance of the Sugar, Ethanol & Energy business. Total net sales during the quarter reached $69.3 million, 37% or $18.6 million higher than the same period of 2015.

As explained during the previous slide, the growth may be explained by the increase in sugarcane crushing, which helped us increase sales and capture higher off-season prices and dilute our fixed costs, enhancing our margins.

Adjusted EBITDA increased significantly during the quarter, from $2.4 million in the first quarter of 2015 to $22.1 million in the first quarter of 2016. Adjusted EBITDA margins expanded from 5% to 32%. Adjusted EBITDA growth is explained by the increase in sugarcane crushing production and sales volumes, driven by the continued harvest model. A 16% reduction in unitary production costs are a result of fixed cost dilution, coupled with the devaluation of the Brazilian real and higher agricultural productivity.

These effects were partially offset by a $11.5 million decrease in hedging results, which means that in the first quarter of 2015 the mark to market of our sugar hedges generated a gain of $12.2 million, while our hedges in this quarter only generated a $0.5 million gain.

On page 13, I would like to walk you through the status of our crops. During the first quarter we started harvesting the bulk of our crops, the harvest of which was fully completed at the commencement of the year. The productivity achieved was very good, due to favorable weather conditions and good operational execution. Yields were 11% higher than the previous year.

During the first quarter, we also started and completed the harvest of our rice crop. Both operational execution and logistics planning allowed us to successfully harvest 37,000 hectares of rice on time. A few days after the harvest was completed, some of our rice farms suffered heavy rains, which would have generated significant losses if the rice was still on the ground.

Rice yields reached 5.9 tons per hectare, 16% higher than last year.

We are starting to see the benefits of our land transformation and [CO leveling] investments and our focus on operational excellence. While still below our target yields on a farm-by-farm basis, I believe we are on the right track.

The rice harvested is in our milling facilities and will be processed into white rice and sold during the rest of the year.

In the case of soybean and corn, plant growth and development was well above average as a result of excellent weather in the plant flowering phase. We began the harvest of soybean during early April. In the [cubic ton] (inaudible) the harvest is advancing well and achieving above average yields.

However, in the north part of Argentina, abundant rainfalls and high temperatures during the second half of April generated significant delays in harvest and logistics complications. Grain quality is also suffering damage from high humidity and high temperatures. Harvest activities recommenced during the last week of April.

It is still early to assess the magnitude of the losses in the North as well as how much will be compensated by the large crop being harvested in the South.

Let's move to page 14, where I would like to walk you through the financial performance of each of the segments within our farming business. In the case of the crops segment, adjusted EBIT increase was $16.7 million, 13% higher than the same period of last year. The increase is primarily explained by higher margins as a result of higher corn and wheat prices in the local market as a result of the elimination of export taxes and quarters, coupled with lower production costs as a result of lower input costs and the depreciation of the Argentine peso in real terms.

Financial performance was offset by lower soybean and [soft] flour prices, coupled with a $9.9 million reduction in hedging results. This quarter the mark to market of our hedging positions resulted in a $0.5 million loss as a result of the rebound in commodity prices, while in the first quarter of 2015 our hedging position generated a $9.4 million gain.

Regarding the rice business, the 56% increase in adjusted EBIT is also explained by a 16.3% increase in yields, coupled with lower production costs driven by the depreciation of the Argentine peso. In the case of the dairy business, operational performance in the quarter was very good. Milk production volumes reached 21.5 million liters, 6% higher year over year, driven by 3% increase in productivity per cow per day and a 3% increase in our dairy cow herd.

Operational performance was offset by lower selling prices, resulting in a decrease in adjusted EBIT. On a consolidated basis, adjusted EBIT for the farming business reached $25 million in the first quarter of 2016, 17% higher year over year.

On page 15, I'd like to briefly comment on commodity prices and our hedge position. As you may see on the chart on the right, since early April, grain prices have rallied over potential downside risks to South Americans' production focused. The rally was further enhanced by macro drivers, including the weakening of the US dollar, increasing crude oil prices and growth of the Chinese economy.

Soybean and corn prices have increased 22% and 16% since early April, respectively. In the case of sugar, price began the year at around $0.15 per pound, decreased to $0.125 per pound by mid-February and then rebounded to above $0.165 per pound by the end of March, the highest price level since October 2014.

Despite an early start of the crop and ideal weather for cane crushing in Brazil, crops in other producing areas like India and Thailand were damaged by last year's severe drought. Consequently, the supply and demand deficit is expected to be larger than forecasted. As a result, funds have begun to build up a large long position once again, pushing prices to the highest level in over 18 months.

As you may see on the table on the left, these recent upward moves in prices have allowed us to improve our hedge positions for the current year and start to hedge next year's production at attractive price levels. I'd like to highlight that we hedge our crops to mitigate short-term price volatility. Our hedging strategies allow us to lock in margins at levels we consider attractive and have a more stable and foreseeable cash flow. However, in the long term we are long commodities, since we own the productive assets.

Let's now turn to page 17, which shows that evolution of Adecoagro's consolidated operational and financial performance. On a consolidated basis net sales increased year over year from $109 million in the first quarter of 2015 to $170 million in the first quarter of 2016. The 7% increase is explained primarily by higher sales volumes for most of our products and higher prices for corn, wheat and ethanol.

Adjusted EBITDA in the first quarter of 2016 totaled $43.2 million, representing a 113% increase compared to the first quarter of 2015. The improvement in financial performance was primarily driven by the implementation of the continuous harvest strategy in the Sugar, Ethanol & Energy business, which resulted in higher crushing of production volumes and cost dilution, coupled with enhanced margins in the Farming business driven by the elimination of export taxes and quarters and the depreciation of the Argentine peso in real terms.

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 the operational and financial efficiencies in each of our businesses.

To conclude, please turn to page 18. As you may see on the top of this chart, our gross indebtedness as of March 31 of 2016 stands at $795 million and net debt stands at $571 million. Net debt was just slightly lower compared to March 2015. It's important to notice that, due to the seasonality of our business, in the first quarter we continued investing in working capital. The bulk of our sales and cash inflows will occur during the second, third and fourth quarters.

As our cash generation ramps up during the upcoming quarters, we expect to see a larger reduction in net debt. In terms of the profile of our debt outstanding, I would like to highlight that two thirds of our debt is in the long term, composed mainly of loans from multilateral banks such as the BNDS and the Inter-American Development Bank. The average cost of our debt is very competitive at 4.4% in dollars and 6.6% in Brazilian reais.

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

(Operator Instructions) Rafael Macedo, BTG.

I have just one quick question. Given that you are seeing better margins in the sugar and ethanol division and better price prospects for grain, you should have strong free cash flow generation, as you mentioned, for this year. So with this deleveraging process in place, my question is when do you expect to enter into new growth cycle and what kind of projects you would be willing to look at.

We have been always very disciplined on how we allocate capital and we are always focusing on the return of our invested capital. So, taking that into account, the first thing that will be -- continue to happen is the deleveraging that you have been just mentioned.

And then regarding the growth projects, we continue to have a very interesting pipeline, mainly in the current businesses that we are having. And when we think on the marginal returns that these projects within the current businesses that we have, it's potentially where we see more attractive returns, especially taking into account that we already have mature teams in this sugar and ethanol Mato Grosso do Sul cluster in our rice operations, in our soy, corn and wheat operation and even in the dairy.

So we foresee growth mainly in our existing business lines. But we will continue to make a focus on the return on invested capital. So we will only see that growth when we consider this is really accretive to our current shareholders.

Okay, thank you.

Antonio Barreto, Itau.

I have two questions about the sugar and ethanol business. And the first one is, we are seeing a little bit of a softer ethanol price at the beginning of this harvest. And I would like to understand how is your carry strategy going to play out for the ethanol products. So are you going to carry a lot of ethanol like you did in the last year? And how do you see the ethanol prices evolving in Brazil throughout this season?

I will ask Marcelo Sanchez, our Commercial Director, to answer your question. Marcelo?

What we are seeing is that prices have been decreasing within the last three weeks. And our carry strategy has already started, and we think, in terms of the volume, that we are going to be carrying as much as possible into our tanks for the season.

And regarding price scenario that we are [forcing] for the next coming months, we are constructive for ethanol prices, 2016. There are several reasons to assure that. Ethanol consumption has positively reacting to lower prices at gas stations. [Piloting] in Sao Paulo is reaching 66%.

Also higher sugar prices are incentivizing mills to increase the mix of sugar production. And that is positive on the ethanol side. And I think that prices that -- level of prices that we have seen last year, around BRL1.3 per cubic meter, are not expected to be seen this year. That is basically our view on the ethanol side.

Thank you, that was very clear. My second question is, how do you see the impact of the weather this year in your sugar cane crops? We have been hearing reports of some frosting in Brazil and we know that with the slowdown of El Nino that you are going to have drier weather.

So, can you give us an overview of how do you see the impact of the weather there in Mato Grosso? And how do you see the impact of this weather in your TRS and tons per hectare productivity yields for 2016?

Today, the impact on the weather on our existing sugarcane plantation, I would say, is excellent. Our sugarcane plantation, as you have seen in our latest yields, is yielding excellent tons per hectare. And if we have a potential La Nina, so if this El Nino is softening and we have a drier climate, that would be excellent for our Sugar and Ethanol business because that will mean that we would be able to have a good period, a good drier period to harvest and collect all our sugar cane.

So a drier season from now onwards will be very welcome on our existing sugar cane in Mato Grosso do Sul. That's basically what we see in the Sugar and Ethanol business if La Nina is coming. And of course a frost is never welcome, but we haven't heard or we don't foresee anything like that.

Anything that you could share with us in terms of estimates for TRS when you compare it to the last year? If this dry weather actually materializes that improves your TRS content, what kind of upside are we talking about here? Any kind of estimate?

No; a drier weather is always welcome for the TRS. So if we have a drier weather, we can improve the TRS in two or three points. But we always look at the TRS per hectare; that's the most important measure that we are always looking at.

Okay. And any idea of what kind of TRS per hectare you are looking at?

No, just what we have been obtaining until now, that is 12 tons of TRS per hectare is something that we can continue to foresee.

That's great, thank you.

Ravi Jain, HSBC.

So I had a question on the Argentina land business. Since the end of last year, have you seen any material increases in land transactions or valuation? And the second question on that is, do you expect the new administration in Argentina to remove the restriction on foreign ownership of land in the foreseeable future?

Regarding land prices, we strongly believe that land prices are always associated to the cash flow generation of that land. And in Argentina, as you've seen, the cash flow generated by each piece of land, because of all these new government policies, have improved. And that, we believe the prices of land continue to increase in Argentina.

We have seen that. We've sold some farms, according to these in latest of the year, at [50%] above our independent valuation. So we continue to see that trend going on. That is on the first part of your question.

And then, regarding the land ownership law, we are hearing from government officials that they are working on that and they will work to have a different thing to what we have. And we've also heard from the opposition, coming from governors like the governor of the Salta province also mentioned this in talking specifically that he will also be working to get rid of this existing land ownership law.

That's very helpful, Mariano. And one last question from my end -- can you give us your thoughts on a potential dividend or the share buyback policy, given that the shares have come down to $11, and plus your thoughts on a potential when you want to start your dividend policy for Adecoagro?

Thank you, Ravi. And this is in line with Rafael's question at the beginning. We always are focused on this return on invested capital. And so the three things are always in our head -- the deleveraging, the growth project and the share buyback or dividend. That is the three things are part of our discussion, or permanent discussion on what to do with that excess cash. We will do whatever is best or we consider is best for being accretive to our existing shareholders.

Thank you, Mariano.

Victor [Sargiato], Credit Suisse.

I just want to understand how you see the agricultural yields going forward. I know that you are going to harvest the Southern farms, which have higher yields. But just wanted to understand if it will be sufficient to offset this decrease in soybean, corn and sunflower yields that you realize.

The second question is, there was a rumor in the market that you are considering to sell the sugar and ethanol business. Just want to understand if have any kind of discussion in this way.

I will address the last part of your question. I think that don't make sense at all. We've heard this several times from Relatorio Reservado. That is a place that I don't know where do they take those type of news and why they release that type of news. That doesn't make sense at all and doesn't make sense to all what we have been talking about and the enthusiasm that we have and how excited we are on our (inaudible) ethanol (inaudible) in Mato Grosso do Sul. So there is no way we have been thinking or talking about this. So I wanted to be extremely clear because of the bad information this guy from Relatorio Reservado, that they are talking about.

Then, going to the farming yields, regarding rice, that is where we finish. We are 16% above last year. And regarding soy, corn and -- that are still in the middle of the harvest, where we see better yields or excellent yields in all our Southern farms and we have excellent yields and excellent soybean in all our Northern farms. But because of the flooding there, our loss is happening on those Northern farms.

The final figures, of course, we don't know. And there is some liability. We're going to be above, I would imagine, the yields. But comparing to last year, last year we had excellent yields in soy and corn, specifically. So compared to last year we still don't know exactly where we are going to be finishing. But we are pretty sure we will end up with very good yields compared to historical -- to our historical pattern. And for sure, we will be above our historical pattern.

Okay, very clear. Thank you.

Fernando Suarez, Raymond James.

Good news from these results. But I was wondering what would be the impact on a quarterly basis on the second, third and fourth quarter of last year, and if you can give some guidance on what will be the impact on previous years in nominal terms.

Sorry, Fernando, I didn't understand the first part. What is the question?

I meant, related to the 41 amendment.

Okay, the biological asset assumption -- I'm going to ask Charlie to take that question. Charlie?

Yes. Obviously, it will depend on the variables that we may be assuming to calculate this year from the fair value of different biological assets, and that is related more to projected yields and prices. So that will determine basically which will be the results.

But as we explained, we should see an increase in EBITDA, conceptually speaking, as we are considering the impact of the fair value of the [next to a month] of the sugarcane and a slight reduction on net income.

And regarding historical figures?

We shouldn't be expecting a big difference, too many changes.

Thanks.

(Operator Instructions) At this time, we have no additional questions. I would like to turn the conference back over to Mr. Bosch for his closing remarks.

As you have seen during the call, we had a very promising first quarter. We believe we are in the right direction to finish the year (inaudible) very good (inaudible).

We have developed one of the most efficient sugar, ethanol and energy clusters, which is already delivering results. And our farming and land reformation business has performed and we are taking advantage of the new policies in Argentina. Our teams have done a great job in reaching these levels of efficiencies and continue to explore more opportunities of improvement to enhance the returns of each business.

So, look forward to seeing you in the upcoming investor relation events. Thank you for joining the call today.

Thank you. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. You may now disconnect your lines.