Adecoagro's CEO Discusses Q3 2013 Results - Earnings Call Transcript

| About: Adecoagro S.A. (AGRO)

Adecoagro SA (NYSE:AGRO)

Q3 2013 Earnings Call

November 13, 2013 11:00 AM ET


Mariano Bosch – CEO

Charlie Boero Hughes – CFO


Rodrigo Mugaburu – Morgan Stanley

Bella Simonato – Merrill Lynch

Enrico Grimaldi – BTG Pactual

Gabriel Kim – Wellington

Giovana Araujo – Itau BBA

Martin Garzaron – City of London


Good morning, ladies and gentlemen. And thank you for waiting. At this time, we would like to welcome everyone to Adecoagro’s Third Quarter 2013 Results Conference Call.

Today with us, we have Mr. Mariano Bosch; CEO, Mr. Charlie Boero Hughes; CFO, and Mr. Hernan Walker, Investor Relations Manager.

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

Mariano Bosch

Good afternoon, everyone. We are very pleased to announce our results for this quarter of 2013. Over the last quarters, we have been focusing in performing in all of our businesses, and enhancing our efficiencies which translates into attractive returns of the invested capital.

In our sugar ethanol, we continue with our plan to complete the cluster of 10 million tons of crushing capacity at a strong pace where we have already planted more than 100,000 hectares of sugarcane.

As of this quarter, our mix have already crushed 4.6 million tons of sugarcane which is almost 50% more than the same period of last year. We are devoted to obtain the maximum efficiencies in each link of the chain of the production that start with the seeding and planting, harvesting CCT [ph], the industrial process, and the logistics in site.

In addition, our management and operating teams have been growing, and improving year after year, renewing their commitment to obtain our demanding results.

With regards to the farming, our land transformation businesses, again, we have put all our focus in obtaining the maximum efficiencies, in our processes, and from there, collect results.

In this sense, I would like to remark, the dairy segment which as anticipated in the previous quarter, has our entire cow herd producing milk in our two state of Via Cristo [ph].

The dairy segment results has surpassed an EBIT of $2 million during the quarter. In the same direction, our rice segment has been showing notorious improvement which are translated in our results.

In this third quarter, we have started the 2013, ‘14 agricultural campaign and direction conditions, seeding and planting of our crop is being done on a timely fashion manner. Under the current circumstances, we anticipate a very good year for our farming business. Although, as you all know, we depend much on the weather during the next few months.

In our land transformation business, we have sold San Martin farm at a 15% premium to the independent appraisal resulting in an operating profit of 6.5 million that will be accounted in the next quarter.

We continue seeking for opportunities to monetize our land transformation and obtain effective returns, while at the same time, we reallocate our capital. Lastly, I would like to highlight that Cushman & Wakefield issued its farmland appraisal report, and valued our land portfolio at $919 million.

We are committed to continue contributing to the appreciations of our farms by applying our sustainable production model, and the transformation of our land which at same improve the productivity of the land year after year.

Now, I will pass over to Charlie Boero, our CFO, who will explain in detail the performance of the company during this quarter.

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.

The chart on page 2 illustrate the monthly rainfalls and TRS at our cluster of Mato Grosso do Sul, compared with the historical five-year average. Even the rainfalls during the third quarter were below average, TRS levels were affected by excessive rainfall during the month of June, as well as crops during the mid-July throughout the Brazilian center-south region.

As a result of these weather events, as you may see on the chart, TRS in sugarcane during the quarter was significantly below the five-year average.

Let’s move to slide 3. As you may see in the top chart, our [indiscernible], 2.8 million tons of sugarcane during the third quarter of 2013, 33% above the third quarter of 2012. Accumulated milling mill to date, extends at 4.7 million tons, 49% above the previous year.

The main drivers for these increased performance are explained in the bottom chart. First of all, the expansion of our sugarcane plantation and supply our mills with the raw material, together with enhanced operational efficiency and optimal weather resulted in a higher utilization capacity of the Angelic and Usina Monte Alegre mills.

And secondly, the ramp up of the Ivinhema mill which started commercial milling operations during April, have allowed us to crush 0.8 million tons of sugarcane during the current harvest.

We expect harvesting and crushing operations at our mills to continue improving at our cluster in Mato Grosso do Sul is consolidated allowing us to capture synergies and economies of scale.

On slide number 4, I would like to analyze key production and [indiscernible]. In the top left chart, you may observe that as the result of substantial increase in sugarcane crushing, our sugar, ethanol and energy production, has increased by 2.5, 47.8 and 12.4% respectively compared to the third quarter of 2012.

Ethanol production increased the move quarter-over-quarter. Our mills have the flexibility to shift production between sugar and ethanol in response to market prices.

As shown on the top right chart, during the third quarter of 2013, our most maximized ethanol production which represented the highest relative price and margins during most of the quarter.

Approximately, 53% of the TRS was shifted towards ethanol production. In addition, our mix have the capacity to produce both hydrous and anhydrous ethanol. Anhydrous ethanol created as a premium to hydrous, ranging between 11% through 18%.

As a result, as you may see in the bottom left chart, 87% of our ethanol sales during the quarter, corresponded to anhydrous ethanol. Our sales volumes for sugar, ethanol, and electricity, also increased during the quarter as shown in the bottom left chart, however, at a slower pace than production.

This is explained by our commercial strategy and carry ethanol into yearend seeking higher prices. The ethanol carry which reflected in the 72.6% increase in ethanol inventories.

Let’s turn to slide 5 where we find the summary of the financial performance of the sugar ethanol and energy business for the nine month period ended September 30, 2013. In 9M13, total sales were 200.3 million, 11.7% of our growth sales for 9M12.

Sugar, ethanol and energy sales, increased by 5.9%, 15.9% and 16.8%. Increases were not something significant primarily due to first, weaker [indiscernible] prices, and second, the depreciation of the Brazilian real which resulted in the lower ethanol and energy prices in dollar terms

Since the majority of production cost are denominated in Brazilian real, margins are expected to remain relatively stable compared to last year.

A graph on the right shows the adjusted EBITDA for 9M13 was 79.9 million representing a 44.8% increase from 9M12. We have stood at [ph] 85.2 million. EBITDA margin has also increased from 32.2% in 9M12, to 42.1% in 9M13.

Improvement in financial performance is primarily driven by the expansion of all sugarcane plantation and the ramp up of the Ivinhema mill which have allowed us to crush 4.7 million tons of sugarcane in 9M13, representing a 49.2% year-over-year growth.

The consolidation of our cluster, has led to operational enhancements which have contributed to the dilution of our fixed cost structure and accordingly improve our financial performance.

We are well positioned to achieve our operational and financial targets in the fourth quarter.

Let’s turn to page 6 where we can see that during the first nine months of 2013, we planted a total of 18,367 hectares of sugarcane, representing a 6% increase on 9m12.

A great majority of the planted area corresponds to the expansion of our plantation in order to supply sugarcane to our customer. Moreover, as of September 30, 2013, our sugarcane plantation consisted of 101,270 hectares representing a 23% increase since the beginning of the year.

As you may see on page 7, we completed the 2012/’13 harvest year. Total farming production reached 699.2 thousand tons representing a 5.3% decrease from the previous year.

These were primarily affected by the drought experienced and encountered [ph] in January and February on the north of Argentina from January to April.

On page 8, we can see two graphs showing the evolution of farming planted area. The top chart shows the farming planted area have gradually increased in 2007/’08 harvest year.

For the 2013/’14 harvest year, we expect to plant 224.8 thousand hectares, 3.5% higher than the 2012/’13 harvest year.

Even through three farms were sold during 2013, decreasing croppable land, the 3.5% increase is mainly attributed for the transformation of land previously held in our portfolio.

The bottom chart shows all the area specifically [ph] an increase from 128.9 thousand hectares in 2012/’13, to 130.7 thousand hectares in 2013/’14. Adecoagro’s own croppable area which is an area that provides the highest EBITDA contribution, has increased by 1.4% for – land transformation. Second, crop area and wheat area, have also increased by 2.1% and 9.4% respectively.

As we will see in page 9, we have already begun our planting activities for the 2013/’14 harvest year. Of the 224,000 hectares estimated to be planted, as of the day of this report, we have successfully planted a total of 104,000 hectares equivalent to 46% of the total planted area.

Wheat and dairy were fully planted during June, and early July. Rice planting was also completed with over 36,000 hectares fully seeded. Random rainfalls have secured water supply in the reservoirs and rivers needed for irrigation of the rice.

We are currently in the process of planting corn and soybean. Weather conditions required from our farms are good, and our operation and teams and contractuals are on set and moving forward to successfully execute the planting plan.

Let’s turn to slide 10. We want to raise [ph] the financial performance of our farming business during the nine-month period ended September 30, 2013. As you may see on the top chart, consolidated sales from our farming $273.5 million in the first nine months of 2013. 9.8% higher year-over-year.

This growth was primarily driven by increased operational efficiencies and productivity gains in our rice and dairy business.

In the case of rice, revenues were boosted by a combination of an 11.9% higher planted area, 5.8% higher yields, combined with enhanced industrial efficiencies driven by the ramp up of the rice processing facility.

The main driver for the improved performance in the dairy business, was up 15.3% increase in cow productivity from 29.6 liters per cow per day, to 32.4 liters per cow per day coupled with a 24.8% increase in our milking cow herd.

In addition, local milk prices have been favored by increasing international whole milk powder [ph] prices. As a result, adjusted EBITDA for both. The rice and dairy business have increase significantly, from negative 0.4 and negative 1 million, to 6.9 and 6.8 million respectively.

Adjusted EBITDA for the crops, business have increased from $24.7 million to $28.7 million mainly driven by $6.7 million gain from our commodities area already hedged for – in 9M13 compared to a $10.4 million net in [ph] loss in 9M12.

On a consolidated basis, adjusted EBITDA for our farming business spend at $43.7 million, 57.2% higher in the same period of the previous year. 2011 [ph] shows the evolution of Adecoagro’s consolidated operational and financial performance during the last five years.

Consolidated adjusted EBITDA for the first nine months of 2013, stands at $114.2 million compared to $72.2 million in the same period of 2012. Total adjusted EBITDA for the third quarter of 2013 is $43.8 million, making a 7.6% increase over third quarter 2012.

Moreover, total adjusted EBITDA margin has expanded from 17.2% in 9M12, to 24% in 9M13, an increase from 24.4% to 24.8% in the third quarter of 2013. We expect Adecoagro’s production volumes and financial performance to continue growing in line with the past five years.

This growth will mainly be driven by one, the transformation and acquisition of Farmland, two, the expansion and consolidation of Mato Grosso do Sul and three, the increase in operational efficiencies in each of our businesses.

We will now turn to page 12 where we can see that as of September 30, 2012, Cushman & Wakefield valued Adecoagro 285,800 hectares at $937.9 million. Since then Adecoagro sold the Santa Regina farm in December of 2012 and the Lagoa do Oeste and Mimoso farms in May of 2013 with the Mimoso farm in May of 2013, a total of 7,500 hectares or $37.1 million.

On September 30, 2013, Cushman & Wakefield updated its independent appraisal of our Adecoagro’s farmland rallying [ph] it’s 278,300 hectares at $919.3 million. This value adjusted for the sale of both farms increased the appraised value of our farmland portfolio by $18.4 million or 2% in September 30, 2012.

We believe that the increase in the appraised value for September 30, 2012 to September 30, 2013 was mainly driven by first, the transformation of underutilized or under-management into high yielding crop and waste land [ph].

Second, the one transformation and productivity improvement of all of our farmland through our sustainable farming land projects and cutting edge technology and best practices, such as milking [ph], farming, crop rotations, valid fertilization, integrated best management and water efficiencies best practices.

And finally the increase annual decrease in farm marketing driven by changes in commodity and input prices. This claims are not reflected in Adecoagro’s financial statements since the company does not mark to market the value of farmland assets on its balance sheet. However, land transformation and appreciation are an important part of Adecoagro’s business strategy. And the company that builds on return on invested capital. I would also like to highlight that the book value of our farmland portfolio in our balance sheet stand at $251.8 million.

Finally on page 12, you can see that our net debt as of September 30, 2013 stands at $681 million, 12.4% higher than the previous quarter. $539 million of bad debt is attributed to our energy sector while the $142 million belongs to farming.

Cash and equivalents as of September 30, 2013 were $260.5 million, 23.8% higher than that of June 30, 2013. Our net debt during the third quarter of 2013 grew 9.9% from $382.7 million in the second quarter of 2013, to $420.5 million.

Short and long-term debt are responding to the farming business was reduced by a total of $22.3 million as loans matured before [ph] the end of the harvest year. Overall, our debt maturity profile has improved as of the third quarter of 2013, 76% of our total debt is in the long-term compared to 66% as of the second quarter of 2013.

Thank you for your time. We are now open for questions.

Question-and-Answer Session


Thank you. The floor is now open for questions. (Operator instructions)

Our first question is Rodrigo Mugaburu, Morgan Stanley. Please go ahead.

Rodrigo Mugaburu – Morgan Stanley

Thank you. Hi, Mariano, hi, Charlie, I have two questions. One, looking at the ‘13, ‘14 crop land in Argentina, I see that there’s a small reduction in soybean first crop and an increase from corn first crop, I guess that this was until September 30. I wonder if this is still the case or given the weather there might be some shifting from corn to soybean in first crop?

And then my second crop is – given the impressive results on the dairy business what are the plans to open a third free stall dairy, are there any plans for that? Thank you.

Mariano Bosch

Hi, Rodrigo. This is Mariano. Regarding your two questions, number one, the change – the small reduction in soya and a small increase in corn is coming from our sustainable production model. That is something we are always focusing. The long-term rotation is something we need to keep in order to increase the fertility of our own farms.

Furthermore, with this planting plan, knowing this current level of prices, that’s something we were seeing on our own production. And taking that into account on a long-term view, the returns were better in farm-by-farm or a field-by-field analysis. That is how we are doing our planning or we always do our planning, is how the final numbers were. And we are not planning to change that. We are pretty much in line with completing this planting season. That is regarding your first question.

And regarding the second question of our plans on the dairy, yes, on our master plan, we do have additional free stalls. But as of now and as of today, we want to prove that this result are possible, that this result are going to continue quarter-by-quarter. And once this is totally proved, we will continue analyzing further expansion.

Rodrigo Mugaburu – Morgan Stanley

Great. Thank you, Mariano.


Our next question is Bella Simonato, Merrill Lynch. Please go ahead.

Bella Simonato – Merrill Lynch

Good afternoon everyone. I have a question regarding the land appraisal by Cushman. I would like to know if you could provide more details on where you saw the highest appreciation versus where land do not appreciate as much for you to get an overall appreciation of the percent of your portfolio? Thank you.

Mariano Bosch

Hi, Isabella. The Cushman & Wakefield appraisal is an independent appraisal and we have the figures and there’s not an important change between countries or between the different places on the increase or not increases.

My personal thinking there is that in general terms, within South America, we haven’t seen an important appreciation of the land simply because of an increase of value of the land. We’ve only seen appreciation and particularly in this farmland also where we have been having land transformation or where we have been having an increase in productivity.

And that is always coming because of the sustainable production model where we have land or soils that are more fertile over the years or where we have an increase on the utilization of the – or the efficiency of the utilization of water like in the land leveling that we are doing in the rice operation. So there is where we see most of the increases on the land appreciation.

And finally as a final remark, according to the value that Cushman & Wakefield is putting today, we’ve been proving through the sales of the different farms, as this lot farm that we sold, the San Martin farm that we’ve always been selling at the premium of this independent evaluation.

Bella Simonato – Merrill Lynch

Perfect. Thank you.


Our next question is Enrico Grimaldi, BTG Pactual. Please go ahead.

Enrico Grimaldi – BTG Pactual

Hi, good afternoon. My question is also related to your updated land appraisal, okay? You mentioned in your release and also earlier in the call today that most of the 2% year-over-year appreciation, your land portfolio is related to land transformation.

So I would like to know how many hectares in Lagoa’s portfolio are still undeveloped or under-utilized as you mentioned. And how is the transformation of the land playing out and at what pace right? But in difference [ph] how many – how many additional hectares of new developed land, should we expect in the coming years for it to be back without assuming acquisitions? That’s basically it. Thank you.

Mariano Bosch

Hi, Enrico. According to your specific question, we still have 12,000 hectares than can be considered as fully transformation from non-productive to productive hectare. But part of this transformation or part of this important transformation is for example the level zero that we are doing in our rice field on our irrigated rice field. We still have 12,000 hectares to be transformed in the next two or three years into level zero. That is a very important change, and this – a CapEx that is required into this land transformation that we are talking.

And on top of that, we still have all our productive hectares, especially the ones [indiscernible] where through this sustainable production model that includes the no till and the crop rotation that I explain at the beginning of the call. We are also increasing the productivity of that farmland.

So all that means the land transformation that we are doing and make an increase on the price of the land, that is not strictly dependent on a simply land appreciation as overall of the farms.

Enrico Grimaldi – BTG Pactual

Okay. Thank you.


Our next question is Gabriel Kim, Wellington. Please go ahead. Mr. Kim, is it possible your phone is on mute? We’re not able to hear you.

Gabriel Kim – Wellington

I’m sorry. Good morning, Mariano. The question I have for you is also related to the appraisal. If the appraised value is up 2% and that was driven primarily by this transformation activity, I guess the other pieces of that would be the currency and sort of the underlying local inflation on the assets. So can you kind of give us a sense for how the underlying – how the underlying price appreciation work out for the hectares that were in the portfolio? Hello.

Mariano Bosch

Yes. Hi, Gab.

Gabriel Kim – Wellington

Hi. I mean, so the question basically does the portfolio appreciate before currency adjustments or was it flat? How did it do on an underlying local currency basis?

Mariano Bosch

Yes, I see your point. In dollar terms that is how we are measuring. We are or my assumption is that the portfolio has not appreciated. That the portfolio has maintained this – it has maintained its value.

In local currency terms of course there has been an increase of the value. But as there is inflation and as the effect have been changing or the effect in general has been – the dollar has been appreciating, in dollar terms; we assume that the land has maintained the same value or more or less the same value.

Gabriel Kim – Wellington

Okay. That’s helpful. Thank you.


(Operator instructions) Our next question is Giovana Araujo, Itau. Please go ahead.

Giovana Araujo – Itau BBA

Hi, good afternoon. My first question is about the agriculture in the sugarcane operations. We see that there is still a gap in the Adecoagro’s agriculture use in the Center South Evers [ph]. What we’d like to understand, how do you explain this gap? Is it more linked to cane varieties? And if you see some gap using in the median term? That’s the first question.

Mariano Bosch

Giovana – hi, Giovana, this is Mariano. As you well know all our sugar cane plantations in Mato Grosso do Sul we’ve been growing to this more than 100,000 hectares that we have already planted. We are starting to see the second cycle of our sugar cane and we see much better restart in terms of yield in the second cycle of the sugar cane. One cycle of sugar cane is six years.

So this second cycle is where we find a much better soil structure. The organic matter that has been contributing during this first cycle is an important improvement including the fertilization and this again, the sustainable production model that with which we try – we treat the sugar cane operation.

So that’s why we do expect to narrow this gap in the following years as we start seeing more of this second cycle. And within the startup process, the quality of the planting that has been improving year-after-year is something that again, we are starting to see the results.

Furthermore, in terms of all the planning of the varieties and the harvesting time of each of these varieties, as we are completing our sugar cane capacity, we are improving on all that planning. And so, we are seeing this gap narrowing in the future.

And if you can see in the past there has been an evolution where we’ve been improving. Even though, the climate has not been a good climate in the last two years, especially in this last year where we have the frost and rainy June that was not the best climate you can see. So basically that would be the comment regarding the yield.

Giovana Araujo – Itau BBA

Okay. Thank you. And the second question is about your planting plan. When we look your estimates for 2013, ‘14, it seems the bulk of the growth in the total farming planted area will be based on leased area, right? Is there a change in the economics, in the farming based on leasing versus last year?

Mariano Bosch

Sorry – no, we are not growing in the leasing area.

Giovana Araujo – Itau BBA

No? Okay.

Mariano Bosch

No, we are growing – so in the planting plant, they grow on the leasing part of – the area is very, very small. It’s more important on the own sectors.

Giovana Araujo – Itau BBA

Okay, okay. But is there a change in the economics of farming based on leasing?

Mariano Bosch

Yes. In Argentina, there has been a slight improvement based on leasing, the leases have been reduced significantly, and a huge portion of our leases have been passed to the share in – research with the owner of the land. So it’s a different system where near 40% of our leasing area has been moved into these sharing research with the owner of the land.

Giovana Araujo – Itau BBA

Okay. Thank you.


Our next question is Martin Garzaron, City of London. Please go ahead.

Martin Garzaron – City of London

Yes, hello. Mariano, good morning. Quick question on – a little bit more on the philosophical on if you want, we’re seeing U.S. oil production growing very fast. And that is something that is not going to change, so we’re also seeing the possibility that the content of ethanol in gasoline, is going to be reduced.

So my question is a little bit, I mean the effects of this, you could say, could – that could free up quite a lot of corn making the corn price to stay lower than previously expected. And to some extent, that could also affect the price of ethanol. And my question is, what’s your view? Are you planning anything?

Obviously, you have a competitive advantage in terms of cost. Are you going to be able to sell better in the U.S.? Are you going to move production more towards sugar? What’s your view on sugar? So that’s a little bit of complicated question, but that’s – I would like to hear your views.

Mariano Bosch

Hi, Martin. How are you doing? Good question. And it’s something that we are looking at, of course.

Basically, we’ve decided not to get into the corn ethanol base. We are only looking at the sugar and ethanol corn. And the sugar and ethanol cost of production, is much lower than the corn ethanol cost of production.

So that is the key. And we’ve analyzed that in terms – in economic terms, and in energy terms. And in energy terms, we have a lot of analysis. They are where – it’s a price – 10 times or nine times lower, the cost of producing ethanol from sugarcane, than from ethanol.

So that is a very important part of our view, and that’s why we are involved in the ethanol through the sugarcane production, and nothing through the corn ethanol base.

Secondly, Brazil’s cost of production or Brazil’s cost of oil production is higher. And Brazil has a very well developed distribution of all the ethanol and the consumption of ethanol. And that’s something in the domestic market that we still see with an increasing demand.

Martin Garzaron – City of London

Okay. Thank you.


(Operator instructions) 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

Before ending the call, I would like to remark that the company’s management and operating teams are fully motivated and focused in obtaining maximum efficiencies. Always looking for excellence in all the chain of production, and at the same time, maintaining a low cost, creating value and attractive returns to our shareholders.

This is our last earnings call of the year, and in the case that we don’t see some of you before our next call, we would like to wish you an excellent end of the year, full of good weather and yields.

Thank you very much, everyone.


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

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