Adecoagro's CEO Discusses 2Q 2013 Results - Earnings Call Transcript

| About: Adecoagro S.A. (AGRO)

Adecoagro SA (NYSE:AGRO)

2Q 2013 Results - Earnings Call Transcript

August 15, 2013 11:00 AM ET


Mariano Bosch - Chief Executive Officer

Charlie Boero Hughes - Chief Financial Officer

Walter Marcelo Sanchez - Chief Commercial Officer

Hernan Walker - Investor Relations Manager


Enrico Grimaldi - BTG Pactual

Giovana Araújo - Itaú BBA

Isabella Simonato - Bank of America/Merrill Lynch

Martin Tapia - Raymond James


Good morning ladies and gentlemen and thank you for waiting. At this time, I would like to welcome everyone to Adecoagro 2Q 13 results conference call. Today with us we have Mr. Mariano Bosch, CEO; Mr. Charlie Boero Hughes, CFO; and Mr. Hernan Walker, Investor Relations Manager.

We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the company's presentation. After the company's remarks are completed, there will be a question-and-answer section. (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 the 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’d turn like to turn the conference over to Mr. Mariano Bosch, CEO. Mr. Bosch, you may begin your conference.

Mariano Bosch

Good morning everyone and thank for attending our call. I would like to go through some of the main highlights of the quarter. Our sugar and ethanol business have shown great progress compared to last year.

Sugarcane crushing and [production] volumes have increased about 80% mainly driven by both one, a higher utilization of capacity as our Angelica mills and two the ramp up of the new Ivinhema mill. And we are happy with the start-up of this new mill that we completed last year.

Now we focusing having an efficient harvest and keep our mills running at full capacity while we enter the peak of the harvest season. Agricultural and Industrial operations have improved significantly. Management is constantly reviewing processes to enhance our operation and results year after year.

Regarding the farming business, we have completed the 2012-13 harvest year a bit below our expectations, mainly as a result of weather conditions.

Soybean has been the most severely affected crop reaching the average yield lower than the previous harvest year, weather was less severe in the corn and rice crops which had better yields than last year.

We are now fully focused in the new harvest, a planting of wheat will advance and we are prepared to start (inaudible) soybean, corn, rice, and the rest of the crops during the next semester.

Our operational and contractual teams have already been assembled and are in the great shape to start working on the new harvest season that we are starting.

I will tell you details how some important pieces in this quarter. We completed the sale of milk possibility facility La Lacteo, we also shut down our (inaudible) dairies and as a result we are proud to announce the 100% of our milking cows are under free stall [productive] system. With these changes we are confident that we will achieve our expected returns under daily business.

Regarding the Land Transformation business we continue with our strategy of selling a portion of our transformed land every year. In order to allocate this capital in better [regenerative alternatives]. In the previous quarter. We announced a sale of our coffee farm at a 7% premium to Cushman appraisal.

In the second quarter, we completed the sale of Santa Regina farm in Argentina at a 16% premium to the Cushman and Wakefield’s appraisal. Also I would like to highlight that we have reduced our corporate expenses and accept of Adecoagro's focus in improving returns for its shareholders. I would like to ask Charlie to roll over the performance of the quarter. Charlie, please, go ahead.

Charlie Boero Hughes

Good morning, everyone. I would like to walk you through a few slides that reflect the main operational and financial highlights of the quarter.

As you may see on slide 2, the 2012 and 13 harvest is practically complete. As of June 30, 2013 [201.8000] hectors or 93% of total area has been harvested. However as of the of the day of this call 98% of the area has been harvested, with only few hectares of net corn remaining.

As anticipated in the first quarter earnings release, most of our crops have been affected by a lack of rainfall throughout the main productive regions in Argentina. Soybean was the most damaged crop both for the company and for farmers nationwide. Average yield where 10% and 15% lower compared to the previous harvest year.

In the case of the corn crop, the impact of the drought was less severe, most of our corn was planted in September and November of 2012 with good soil moisture. The crops water requirement peak, is between mid- December and early January, when amount of water in the soil was adequate.

Consequently the corn crop only suffered [stress] during the last stage of its growth cycle. Although yields stand 9.3% higher than the previous harvest year, they are below our expectations.

In the case of rice the average yield of our rice farms was 5.7 tons per hectare, 4.6% higher than the previous harvest year are still below the potential of our farms. We expect yields to continue improving as we complete the transformation process and zero-leveling of our rice farms.

On the left side of page three you may see a chart that shows the drought experienced enduring (inaudible) in Pampas, the country’s corn-fed region in the 2012 and ‘13 harvest years. Rainfall during January and February was significantly below the historical levels. Rains from January to February in this region are critical for soybeans and the crop undergoes the pod forming and grain filling phases in which the plants' water requirements peak. Therefore a dry weather caused irreversible damage on the crop development. The drought also affected the development of soybean second crop and corn.

The chart on the right side of the page shows rainfalls for our farms located in the Northwest of Argentina. The regions suffered from an even more extended drought period which started in January and lasted until May 2013. Soybean first and second crop and corn yields in this regions was really affected by the lack of water.

On slide four you will find the financial performance of the farming business. As you may see in the top right chart the consolidated sales of our farming business for the first six of 2013 were US$173.3 million, 8% higher than the same period of the previous year. The main drivers of this increase was the improvement in our rice and dairy segments. Regarding rice the combination of a higher flooded, better yields, and better prices increased our sales by 32% and (inaudible) a larger cohort combined was improved high productivity environmental prices, gross sales increased by 53% during the period.

Gross sales had a slight reduction compared to last year, mainly due to lower soybean yields and a slightly decreased in planted area. On the right side of the bottom chart, you may observe that the consolidated adjusted EBITDA of our farming segments increased 22% from US$27.3 million in the first six months of 2012 to US$33.2 million in the first six months of 2013. This growth was also driven by the performance of the rice and dairy segments, which increased adjusted EBITDA by US$5.8 million and US$5.1 million respectively from the period.

In the case of dairy segment, adjusted EBITDA was forcibly impacted by the sale of La Lacteo a small milk processing facility which generated $2.9 million of adjusted EBITDA in the quarter. These results were partially offset by poor results in the quarter business which was in fact sold during the second quarter of 2013.

Lets’ move to the land transformation business on page five. As reported in the fourth quarter of 2012 earnings release, on December 27, 2012, at Adecoagro sold 51% of the outstanding shares of Santa Regina SA, a company whose main underlying asset is the Santa Regina farm for a total of $13 million equivalent to $7,000 per hectare. In that transaction Adecoagro also granted the buyer with a purchase option to acquire the remaining interest.

On July 14, 2013 the buyer decided to exercise the purchase option to acquire the remaining 49% of Santa Regina for a total price of $13.1 million equivalent to roughly 7,400 per hectare and 16% of last Cushman and Wakefield independent appraisal dated September 2012. According to IFRS accounting rules Adecoagro recognized a $10.5 million non-cash gain in the fourth quarter of 2012, or starting to the (inaudible) of the remaining 49% interest in Santa Regina SA.

With the exercise of the purchase option Adecoagro statement to realize the gain recognized in the fourth quarter of 2012 and January then additional $1.2 million of adjusted EBITDA. On May 2, 2013 Adecoagro sold Lagoa do Oeste and Mimoso farms located in Luis Eduardo Magalhaes, Bahia, Brazil. The farm has a total area of 3,834 hectares of which 904 hectares are planted of coffee trees. The company will receive a total of $20.8 million for the farms, which reflects a 7% premium compared to the Cushman and Wakefield independent appraisal, dated September 2012.

As you may see on the volume chart, Adecoagro has a strong and consistent track record of monetizing capital gains from a slammed transformation activities. Over the last eight years we have generated in aggregate a $138 million of net capital gains. On slide 6, you will find the chart that analyzes the growth of our sugarcane milling from the first six months of the 2012 to that of 2013.

As you may notice sugarcane crushing increased by over 80% as a result of two main factors. First a higher utilization of capacity at our Angelica and UMA mills compared to the same period of the previous year and second the crushing at our Ivinhema mills which started commercial operations this year.

The main driver for the improvement of financial performance was the increase in capacity utilization at our already existing mills. Our sugar, ethanol and energy operations have a high operational leverage and we expect that the return on invested capital of these investments to continue increasing as we reach full capacity utilization.

On the next slide, we will see how as a result of the increase in sugarcane crush, our sugar, ethanol and electricity production increased by 65%, 89% and 76% respectively. (inaudible) our high flexibility to produce both sugar or ethanol. Furthermore we can produce hydrous or anhydrous ethanol. Therefore our commercial team is constantly tracking price priorities in order to maximize the production of the most profitable product.

In the first semester of 2013, we maximize the production of ethanol, 61.3% of the TRS was directed towards ethanol production, which presented the highest margins during the period. Furthermore as you may notice in the bottom left chart, 58% of the ethanol produced was anhydrous ethanol which traded at a premium to hydrous ethanol. Lastly, moving to the bottom right chart, we may observe a strong increase in exported energy.

Cogeneration is a strategic part of our business model. The marginal cost of production of burning the sugarcane for gas is extremely low. Therefore the profitability of cogen is very attractive. Let's turn to slide 8 (inaudible) financial performance of the sugar, ethanol and energy business. Net sales increased from $94.8 million in the first six months of 2012 to $172.7 million in the first six months of 2013. This growth is explained by the increase in both production and sale volumes and offset by lower prices.

Moving to the chart on the right, we may see that both adjusted EBITDA and adjusted EBITDA margin had a considerable increase year-over-year. The combination of the increasing sales volume coupled with bearing capacity utilization growth, adjusted EBITDA and EBITDA margin to increase from 8.8 million to 14.7 million and from 9.3% to 34.6% respectively.

Let's move to slide 9. In the second quarter, our net income was negatively affected by the 27.2 million foreign exchange loss. This loss was generated by the impact of global currency depreciation on the dollar denominated debt and by our local subsidiaries and the mark-to-market of currency derivatives. As you may see in the charts on the left side of the slide, the Brazilian real and the Argentinean peso depreciated by 9.1% and 4.9% against the U.S. dollar respectively during the second quarter of 2013.

Now I would like to explain why these losses are generated and how they will be compensated in future quarters. In Brazilian sugar and ethanol operation revenues generated by sugar export sales are dollar denominated, while sugar production costs are mainly denominated in Brazilian reals. In order to lock our margins in addition to raising sugar prices, we also hedged the future dollar inflows generated by sugar exports. Since we do not use hedge accounting, we must recognize the losses generated by this currency hedge instruments every quarter.

Additionally these future sugar export flows allow us to finance our working capital with dollar denominated credit facilities. The payment of principle and interest of these loans are not really hedged with the future sugar we will collect. Other than that from an accounting point of view, we must revalue our dollar denominated debt every quarter according to exchange rate fluctuations. In the upcoming quarters as we export our sugar production, we will collect dollar inflows and the spot real rate compensating the losses recognized during the previous quarters.

Let’s move to slide 10, on April the 25, 2013, the Ivinhema mill successfully begun the 2013 and '14 towards the harvest of 2 million tons of nominal sugarcane crushing capacity and the flexibility to produce both sugar and ethanol. Adecoagro begun the construction of the second phase of this greenfield project, which will expand nominal capacity to 4 million tons by the early 2015.

Total capital expenditure including the mill facility, ,agricultural machinery and sugarcane plantations for the second phase is estimated at US$222 million. This expansion will be fully financed by the 10-year loan granted by BNDES, the Brazilian Development Bank, on December 27, 2012, at an average interest rate of 4.65% in Reais.

Page 11 shows the evolution of Adecoagro’s financial performance during the last three years and from the six month interim period. Consolidated adjusted EBITDA for the third and six months of 2013, has more than doubled from 31.6 million in 2012 to 70.5 million in 2013.

Adecoagro’s adjusted EBITDA has been growing steadily since 2010. A minor setback in 2012. We expect this upward trend to continue over the next years and yields in our farming business are stabilized and at the ramp up of the sugar, ethanol and energy captured is consolidated allowing us to capture important synergies, economies of scale and cost dilution.

Finally, on page 12, our net debt as of June 30 2013 has increased from $402 million driven by a $12.6 million increase in outstanding debt and a $6.4 million decrease in cash primary, in order to finance our capital expenditures related to the construction of Ivinhema mill.

Thank you for your time, we are now open to questions.

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session (Operator Instructions). And the first question comes from Enrico Grimaldi of BTG Pactual. Please go ahead.

Enrico Grimaldi - BTG Pactual

Hello, good afternoon everyone. I have two questions, the first one relates to the possibility of you guys selling more assets going forward. I mean you sold La Lacteo this quarter, which seemed like a good transaction, but going forward should we expect other transactional like these?

And if so I mean can you share with us what sort of non-core assets you have today in the company that could be divested? That will be my first question.

Mariano Bosch

Hi Enrico, this is Mariano. Yes, you should expect more sales of already the developed farms, those are the type of sales that you should expect on the next, during the future that’s exactly the same strategy during the future. That's exactly the same strategy, that we'd be having since we started with the company.

We don't have any more noncore assets, so I don’t expect any sales of noncore assets, the noncore assets were La Lacteo and the coffee business which we've already sold.

Enrico Grimaldi - BTG Pactual

Great, thank you, Mariano. And if I may my second question is related to sugar and ethanol business in Brazil. You said in your release that is for asking (inaudible) just for last month and you expect that you have very revolving back to you right, but at some 4% impact in next year crushing right. And again as my question is how do you think you can minimize the impacts from such a weaker sugarcane crushing next year, maybe looking putting differently here, what sort of measures could you guys take at management level, to minimize the impact of low crushing in your EBITDA for the [division] of next year that will be my second question. Thank you.

Mariano Bosch

Enrico, what we've been doing and, Marcelo may add something, what we've been doing now in order to mitigate that a problem is that we've been accelerating our planting with a varieties that we could previously 12 month varieties. So that is one of the measures we've been doing. We are also buying sugarcane from third parties and we are also buying sugarcane from third parties, and we've start to close a small contract on sugarcane from third parties. So those are the measures we are doing.

But having said this, we had enough sugarcane in our plant for next year, because during next year, we are not expanding new capacity, the new capacity coming from Ivinhema will be in 2015 and not in 2014. In 2014, we are planning to reach a full capacity in Angelica and Ivinhema at our current full capacity.


Our next question comes from Giovana Araújo of Itaú BBA. Please go ahead.

Giovana Araújo - Itaú BBA

Hi, good afternoon. My first question is about sugar and ethanol operations, one thing that calls our attention here is for the agriculture use tons of gain per hectare, it was pretty much in line with last year levels. And shouldn't your productivity be higher, year-over-year or higher versus the average of (inaudible) sector considering your cane feed is younger. Is it because of the weather or also because of the cane variety and I would like to know how do you see this productivity evolving going forward. First question.

Walter Marcelo Sanchez

Hi, Giovanna. During this year, it's in line with last year as you are mentioning, mainly because we have a relative dry summer and that's why we are not seeing an increase that in those yields. In the future we should expect yields to continue growing as we go forward during the year and that’s because of many of the things we are doing on the new area that we are planting now like removing trees, like that you would expect like a 5% increase in yields, like the soil that we'll be improving as we add organic matter into that soil.

So that’s why you should expect an increasing yields over the years and you should expect us maintaining the average age of the sugarcane inline what it is today.

Giovana Araújo - Itaú BBA

Okay, okay, perfect. And my second question is about the land market if you can give us an update how land market is evolving in Argentina if liquidity is in line with what you guys were expecting or not? And what’s your expectation going?

Walter Marcelo Sanchez

Are you asking only for Argentina or for both?

Giovana Araújo - Itaú BBA

No mainly for Argentina.

Walter Marcelo Sanchez

Okay. Land market in Argentina in terms of liquidity as we’ve always mentioned is relatively low and it is as we expected but we are being able to (inaudible) you can see in our reports and we feel comfortable, we will continue more or less with the same pace that we’ve been doing this year.

In terms of pricing we are not seeing any increasing prices nor a decrease and we think that is what we are seeing in the market in terms of prices. We will have our Cushman and Wakefield evaluation in September and let's see what this independent valuation shows in terms of how they see the market.


Our next question comes from Isabella Simonato of Bank of America/Merrill Lynch. Please go ahead.

Isabella Simonato - Bank of America/Merrill Lynch

As the crushing season starts in Argentina for some crops now, Mariano, could you give us an update of what do you expect in terms of planted area or yields for the 2013 and ‘14 season? Thank you.

Mariano Bosch

Hi Isabella. In terms of our Adecoagro, we expect more or less the same planted hectares in what we did last year, and in terms of crops, also more or less in line taking in to account that we always prioritize the long-term profitability and the sustainability of our production system. So that’s why you don’t see a lot of changes in terms of the different crops or the mixing crops that we're planting this year. In terms of yields, we do expect an average yield and in an average year yields should be a lot better than what we had this year and last year.


(Operator Instructions) And our next question comes from Martin Tapia of Raymond James. Please go ahead.

Martin Tapia - Raymond James

I actually have a couple of questions. First one, during the second quarter of this year, total CapEx which is $48.5 million, how much was it related to the construction of the minimum yield and how much comes from sugarcane plantation and [materials] also?

Mariano Bosch

Charlie do you want to answer that exactly.

Charlie Boero Hughes

Basically we are invested in CapEx in the sugar and ethanol and energy about $46 million of which $23 million was for sugarcane planting and 23 for sugar and ethanol mills of which I would say that most of them was for Ivinhema and Angelica.

Martin Tapia - Raymond James

Thank you and particularly the Ivinhema mills in terms of production is inline with your original estimations?

Charlie Boero Hughes

Yes, Martin it’s a very much in line and we are very happy on how this startup is going, and it’s much better than what we did in Angelica when we did our first startup four years ago.


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

Mariano Bosch

So before we end the call, we wanted to thank you all for joining. Now we have our semester full of challenges in all our businesses. The company is in great shape both from a financial and operational standpoint. All our teams are highly motivated and we are specific to our cost and we continue working to deliver effective results to our shareholders. So I look forward to see in our next IR event, thank you.


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

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