Adecoagro SA (AGRO) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro's Third Quarter 2017 Results Conference Call. Today with us, we have Mr. Mariano Bosch, CEO; Mr. Charlie Boero Hughes, CFO; and Mr. Hernan Walker, Investor Relations Manager and Director, of the senior management Team.

We would like to inform you that this event is being recorded. (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'll turn the conference over to Mr. Mariano Bosch, CEO. Mr. Bosch, you may begin your conference.

Good morning, and thank you for joining Adecoagro's 2017 Third Quarter Results Conference. I would like to start by referring to what I believe was the main highlight of the quarter. By end of September, Adecoagro made its debut in the debt market by successfully issuing a 10-year $500 million bond with a 6% coupon rate. This was, by all means, an outstanding transaction that has further strengthened our already solid balance sheet position, enhancing our ability to execute our strategy and focus on long-term shareholder value creation. At the same time, this is a result of market confidence in the company and its ability to continue generating attractive returns.

Moving to the performance of our business during the quarter, I'm proud to present good financial and operational figures. In our Sugar, Ethanol and Energy business, factory increase in Angelica's nominal crushing capacity, we were able to fully offset the first semester delay in crushing activities. Our expansion project is being executed at high speed. Asset investments at the Angelica mill are complete, and nominal crushing capacity has now reached 1,050 tons per hour. Works at Ivinhema are advancing according to plan, and we expect to conclude them by the end of next year.

Regarding sugar cane plantation, almost 50% of the needed land to supply the increased capacity at the mills are already leased, and expansion activities are well underway. At this pace, we feel very confident to reach our initial target of crushing 14.2 million tons by 2023. It's important to remember that since this is a marginal investment that enhances the efficiency of the entire operation, IRR is above 20% even at current commodity prices.

Moving to our Farming and Land Formation business. I would first like to comment on our daily operation. We are announcing the completion of our first bio-digester. We believe this enhance the sustainability of our free stall operations by generating 1.4 megawatt of electricity out of the manure produced by our 7,000 milking cows. In addition to increasing revenues and securing our energy requirements, this project exhibits our commitment to the environment as we are reducing our carbon footprint by lowering greenhouse emissions. At the same time, it's worth mentioning that this project would further contribute to cost reduction as more bio fertilizers will be used in the detriment of other chemical.

We are convinced that we succeeded to develop a highly profitable and self-sustainable business through which we transform vegetable protein into animal protein in a very efficient manner, and we are keen to expanding our existing operations. In this line, the growth project that we announced is ongoing according to the schedule and budget. We are confident to reach the initial target of doubling capacity during the next 5 years. Existing operation efficiencies, coupled with the current energy saves, will allow us to generate an IRR above 20%, once current market conditions are factored in.

In the case of crops and rice, the 2016/'17 harvest year is completed, and we achieved very good yields and economic results despite the floods and heavy rains that feed most of the [crop] regions of the country. This evidence not only the efficiency and commitment, but also the coordinated work between the harvest, logistics and commercial teams to maximize the sale of our production after the rains. From an operational perspective, all of our things are fully focused on the planting of the 2017/'18 harvest year. Crops are developing in excellent conditions, and we are starting the period in which most of the yields are defined.

As a summary, so far, this has been a good year, and I think that the accumulated financial and operational figures so prove. We are in the right track to conclude another solid fiscal year generating attractive returns. On a long-term perspective, we are convinced that we need to keep on focusing on the operational efficiencies in order to become the low-cost producers of each of the commodities that we produce. This, as I always insist, is the only sustainable strategy to generate stable and attractive returns to our shareholders.

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

Thank you, Mariano. Good morning, everyone. Let's start on Page 4. As shown in the chart on the top left, milling per day increased by 7% in the third quarter of 2017 as a result of the expansion in nominal crushing capacity at the Angelica mill. This additional capacity allowed us to accelerate the milling pace and crush a total of 4.1 million tons in the third quarter 2017, 8% above last year. So as of today, we have crushed more than 8.9 million tons of sugarcane. We are well on track to reach our target during November and December, assuming normal weather conditions.

Please turn to Page 5, where I would like to highlight a few agricultural productivity metrics. As you may see in the top left chart, yields per hectare in the quarter had reached 80 tons, 24% lower than last year, mainly as a result of above-average rainfall in November 2015 and February 2016, which were highly beneficial for 2016 crop compared to below-average rains in the fourth quarter of 2016 and the first quarter of 2017, which has affected the proper development of the current crop, and a longer average growth cycle for the cane harvested in 2016 compared to the current season. TRS per ton reached 137.7 kilos, slightly above last year, resulting in a 23% reduction in TRS per hectare. We expect higher average productivity to increase in the fourth quarter as we will be harvesting plots with a longer work cycle.

Let's move to Slide 6. Production in the third quarter has been positively affected by the increase in sugarcane crushing. As you may see on the bottom left, both the production measured in TRS equivalent increased by 12%. In terms of product mix, the fact that anhydrous prices traded during the quarter at an average premium of 15% and 7% over sugar, respectively, resulted in higher ethanol mix. 52% of total TRS production was diverted towards ethanol. Consequently, ethanol production increased by 26% year-over-year while sugar production decreased by 1%.

Now let's please turn to Slide 7, where I would like to discuss the sales. Ethanol prices at the beginning of the quarter reached the lowest levels observed in season. However, changes in PIS/COFINS taxes on fuels announced by the government in mid-July boosted prices by 15%, allowing average prices to end up essentially in line with last year. As explained earlier, we maximized ethanol production during the quarter to capture better ethanol prices versus sugar.

Ethanol sales volumes reached 81,100 thousand cubic meters, 8% higher year-over-year. Average realized prices stand at $455 per cubic meter, in line with the same period of last year. Selling volumes increased by 8%, resulting in a 7% increase in net sales. In the case of sugar, prices continued decreasing during the quarter, trading 11% lower year-over-year. However, prices were up, led by a 21% increase in selling volumes, resulting in a 7% increase in net sales. Energy prices reached $70 per megawatt hour, 22% higher compared to the same period of last year. It was mainly the result of low rain levels recording in the south of Brazil. As a result of the increase in sugarcane crushing, energy volume increased by 32%. This resulted in a 61% increase in net sales. In aggregate, net sales in the quarter reached $171.9 million, 12% higher than the same period of last year.

I would like to turn to Slide 8, where we can see the overall financial performance of Sugar, Ethanol and Energy business. Adjusted EBITDA in the third quarter of 2017 reached $74.3 million, 7% lower than the third quarter 2016. Adjusted EBITDA was positively affected: an 8.4% increase in sugarcane crushing, coupled with a 1.8% growth in TRS per ton of sugarcane, which led to an 11.6% increase in total TRS produced; higher sales volumes for sugar, ethanol and energy, coupled with a 21.8% increase in energy prices; and a $9.6 million higher result from the mark-to-market effect of our commodity hedge position. These positive effects were offset by a 14.2% increase in production cash costs per ton of TRS produced in real terms. Approximately half of this cost increase is temporary and will be reversed in the fourth quarter. The net increase in cost is explained by lower sugarcane yields, which have increased the amount of hectares harvested, leased and treated and purchases of sugarcane from supplies.

On a cumulative basis, adjusted EBITDA in the first 9 months of 2017 grew by 8.5%, reaching $165.8 million. The main drivers for this increase were: a 30.6% increase in net sales as a result of higher sugar, ethanol and energy sales volumes and realized prices; the mark-to-market effect of our sugar hedge positions in the first 9 months of 2017 generated a gain of $76.5 million, which was $59.5 million higher than in the first 9 months of 2016. These positive results were partially offset by a $37.5 million decrease in changes in fair value generated by the mark-to-market effect of our unharvested sugarcane plantation, primarily as a result of lower projected sugar prices and productivity; coupled with our 15.5% increase in unitary production cash costs, as explained previously.

Finally, we conclude with the Sugar, Ethanol and Energy business on Page 9. I would like to comment on our Sugar, Ethanol and Energy hedging position. We have entered into hedge positions related to the current harvest and also next year's production at very attractive prices. In the case of sugar, for the current crop, we have hedged approximately 70% at an average price of $0.18 per pound. Regarding 2018 production, we have hedged approximately 23% at an average price of $0.185 per pound.

I would now like to move on to the Farming business. Please direct your attention to Slide 11. The '16/'17 crop was essentially completed during the quarter. A total of 225,000 hectares were harvested, producing 877,000 tons of diversified crops. As you may see on the chart, production has gradually increased in the [2020] season, driven by our land transformation and sustainable production model, which enhances soil quality and productivity. We have also begun planting activities for the '17/'18 crop. As you may see in the bottom chart, we expect to plant a total of 231,000 hectares, 3% higher than the previous crop.

Let's move to Page 12, where I would like to walk you through the financial performance of our Farming business. As you may see on the chart, on a quarterly basis, adjusted EBITDA for the Farming business was $6.9 million, 57% lower year-over-year. these results is mainly explained by an extraordinary gain recording in 2016 related to the settlement of an arbitration dispute related to the early termination of land leasing contracts and a 1.1 million decrease in our rice segment, driven by the postponement of rice sales volumes to the fourth quarter to capture higher prices. Results were partially offset by $0.5 million increase in our dairy, primarily as a result of higher milk prices.

Let's now turn to page 14, which shows the evolution of our [required] consolidated operational financial performance. On a consolidated basis, net sales in the third quarter of 2017 increased by 7% year-over-year, mainly explained by higher sugar, soybean, corn and energy selling volumes coupled with higher average realized prices for energy and soybean. Adjusted EBITDA in the third quarter 2017 totaled $75.3 million, representing a 16% decrease compared to the third quarter of 2016. As previously explained, this is explained by extraordinary gain recording in the third quarter of 2016 corresponding to the settlement of an arbitration dispute related to the early termination of land leasing contracts, coupled with the increase in production cash flow in our sugar, ethanol and energy business as a result of the normalization of yields. On a year-to-year basis, adjusted EBITDA stands at $187.2 million, 2% higher than last year.

Let's now turn to Slide 15 to take a look at our net debt position. I'd like to highlight that during the quarter, we issued a 10-year bullet $500 million bond at an interest rate of 6%. This milestone transaction has allowed us to enhance our balance sheet and into long-term financial flexibility. In addition, this transaction has allowed us to extend our average maturity from 3 years to 8 years and reduced our long-term cost of capital. The bond proceeds will be used mainly to refinance debt.

As of September 30, we have $300 million of bond proceeds in cash. Therefore, our gross indebtedness in the third quarter 2017 increased to $1.1 billion. Gross debt will be reduced during the fourth quarter as we continue [entering] loans with the bond proceeds. Net debt stands at $586 million while net debt-to-EBITDA ratio stands at 1.9x compared to 2.4x in the same period of last year. We expect net debt to continue falling by year-end, driven by positive cash flow generation in the fourth quarter. The cash flow during the first 9 months of the year was negative $7 million, explained by the seasonality of our working capital requirements. As was the case in previous fiscal years, we expect strong cash flow generation in the fourth quarter as we sell our product inventory, generating positive cash flow for the full year 2017.

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

(Operator Instructions) The first question comes from João Soares of Bradesco.

I want to understand a little bit better what's happened here with the sugar prices that you reported this quarter, down 11% year-over-year. Considering that you have already hedged (inaudible) about none of these harvests and at much higher pricing than last year. It's just -- I don't know if there's something I missing here with regards to these prices. And my second question is, considering the potential tax reform in Argentina with a potential reduction in income tax rate and -- is there any changes in your planning? Any visibility on -- in terms of do you guys are going to fix a payout policy once you make more clear how much income tax you're going to pay?

João, thank you for your question. Related to your first question, the price of the sugar that we report is a price at which we sell. Then we have the -- in the line of other operating income, the gain of the mark-to-market of what we sold before. That is almost $30-something million. So in order to have an idea or the benefit of what we hedged before, that should include this mark-to-market gain that is reported in the quarter. That is to answer the first part of your question. And then...

The tax reforms.

Regarding the tax reforms that the -- we see in Argentina, we are still understanding, and there is still some time to finalize what is it that is going to be the final outcome. In general terms, we see this as a positive for Adecoagro Argentina in general, but we need to understand exactly how this end up in the negotiation with the provinces and the different taxes that are being negotiated. And with that information finalized, I think we would be ready to inform more clearly what this effect on our final cash flow generation. But in general terms, I would say this is clearly positive for us as a company.

(Operator Instructions) Our next question comes from Augusto Ensiki of HSBC.

Two questions. Firstly, one kind of general. What's your current view on the sugar market? And what we can expect in terms of -- or rather what you expect in terms of prices going forward into the end of the year and early next year? And secondly, I noticed that you included an adjusted net income on the report. I wonder if you could go into a little bit more detail what goes into that calculation and basically how you go from the regular to this -- or what are the investments involved?

Augusto, thank you for your question. We have Marcelo Sanchez, our Commercial Director, that will take the first part of your question regarding our view on the sugar market. Marcelo, can you share your views, please?

Yes. Thank you, Augusto, for your questions. We have been witnessing a recent rally in sugar prices that mainly driven by strong oil prices, that current -- support the macro (inaudible) scenario can result in funds also continuing to cover in the actuals and pricing value further. This is for the, let's say, short-term position in prices. And of course, for next year, there's a -- fundamentally, there's a -- the sentiment remains -- it varies because of the [SND] are [advancing] to a surplus. And given that this is still a long way until this is going to be materialized, we expected volatility on the next 3 months to come. That's basically the view that we do have on the sugar. And next year's behavior of the millers regarding the hedge that they do have as of today in terms of sugar, that will give us the possibility of switching into ethanol and that -- and the ethanol will be the main performer since -- from our view. Thank you.

Thank you, Marcelo. And now for the second part of your question, Augusto, I will ask Charlie Boero to answer your question.

Augusto, basically, what we are trying to do is to align our net income with our EBITDA and cash flow concept. So what we've done here is we deducted the noncash FX losses to the net income. That's the explanation.

So it's just the FX losses?

Right.

And those are noncash, correct?

Noncash, noncash, right.

Our next question is from Isabella Simonato of Bank of America Merrill Lynch.

A question with regarding the uses of cash. I understand that most of your CapEx in the coming years goes for sugar and ethanol. But the recently bond you issued, if you could go into more detail the use of proceeds and if further diversifying the business is something that you think of eventually. We also know that you're expanding a little bit the dairy division. What's the growth plans in the long run?

Isabella, thank you for your question. Specifically on the uses of cash of the bond proceeds, Charlie explained 80% of it is to refinance the existing debt. And then this also puts us in a very strong and solid position on our balance sheet. So I would like to be more specific regarding our growth projects and the uses of -- our plans on the uses of cash. So I would like to first mention regarding our organic growth projects that have already been announced, and we have already started the construction of this project, including 30% increase in our Sugar, Ethanol and Energy cluster, including doubling our dairy operations that I mentioned at the beginning of that call that are doing great. Also, our investments already announced on the grain conditioning plants in Argentina. All of them are generating IRR above 20% at current flat scenario of commodity prices. So it's clear that these projects will allow us to increase EBITDA 50% in the next 4 years. And in addition, with the rest of the cash that we are generating in the company, at this level of prices, the best use of capital is also to buy back shares. So we will accelerate the pace under our share repurchase program.

Our next question comes from Thiago Duarte of BTG.

A quick one from my side. Basically, a follow-up from the recent calls. I think it was 1 or 2 quarters ago, Mariano, that you were discussing the divestment or the monetization of the Land Transformation business in Argentina. It's been a few quarters since we don't see a farm sale. And I think 1 or 2 quarters ago, you sounded very optimistic about the ongoing negotiations involving, I think, 2 or 3 farms. So just nice to get an update from that and whether you think you could resume the farm sales in the foreseeable future. It would be great to hear a little bit more.

Thank you, Thiago, for your question. We still feel very confident on these current negotiations. As we've said many times, this is a relatively liquid market on the buying and selling of farms. So that's why it's been taking a little bit longer than what we were assuming. But we are still very confident on achieving these sales of the already transformed farm and some of these negotiations that are still in the middle of the negotiations.

Our next question comes from Nam Tran of EMS.

Mariano, it's Edmond Safra. I just have a question. Just following up a little bit on your comments on land sales. I presume they would be at a value that, at least, reaffirms or maybe above your recent NAVs on the land. And that, coupled with your comments on share buybacks, how much do you have left on your authorization?

Thank you, Edmond, for your question. We have renewed our share buyback program. That is a 5% share buyback program in -- by the end of September. So we still have a very relevant part of this 5% that we have just renewed.

(Operator Instructions) Our next question comes from [Elaine Chao] of [Niagnuzu].

Could you explain a little bit about your current hedging position for the upcoming harvest season? And what's your outlook for this harvest?

Okay. Thank you, Elaine, for your question. I'm going to ask Marcelo Sanchez, our Commercial Director, to answer your question.

Can you please repeat the question? I couldn't hear it. I'm sorry.

The question is about this coming season, harvest season. What's your current hedging position? And what's your overall outlook in terms of the price and the volume, especially for sugar?

Okay. Thank you. Thank you, Elaine. I'm sorry about. We (inaudible) at the end of the third quarter, we had hedged almost 23% of our sugar production. And -- for next year. And we are -- as of today, we took advantage on the recent rally that we witnessed in sugar, and the -- we're -- we achieved around 40% as of today. The level of prices that is going to be in the average for next years with -- combining what we already have hedged is in the range of between the $0.16 and $0.1650 a pound for sugar.

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

So 2017 is being a good year, proven by the accumulated financial and operational figures. We are on the right track to conclude another solid fiscal year.

Before closing the last earning call of the year, I would like to thank you all for your support and confidence and let you know, as we do every year since our inception, that we have renewed our commitment to continue with our obsession of create shareholder value by allocating our resources in the projects that generate attractive returns. We have a promising 2018 coming ahead and are ready to accept the challenges.

We look forward to seeing you during our next IR event.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines, and have a nice day.