Adecoagro's (AGRO) CEO Mariano Bosch on Q2 2014 Results - Earnings Call Transcript

Aug.17.14 | About: Adecoagro S.A. (AGRO)

Adecoagro S.A. (NYSE:AGRO)

Q2 2014 Earnings Conference Call

August 15, 2014 8:00 AM ET

Executives

Mariano Bosch – Chief Executive Officer

Charlie Boero Hughes – Chief Financial Officer

Walter Marcelo Sanchez – Chief Commercial Officer

Analysts

Isabella Simonato – Bank of America Merrill Lynch

Ravi Jain – HSBC Securities

Santiago Ruiz – Raymond James

Thiago Duarte – BTG Pactual

Vincenzo Paternostro – Credit Suisse

Operator

Good morning ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro’s 2Q '14 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. At that time, further instructions will be given. (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 the conference.

Mariano Bosch

Good morning everyone, and thank you for joining our call. The company had shown excellent results for the second quarter in all our business segments.

Now, let me highlight some of the more realigned achievements during the quarter before I pass the word to Charlie. We are in the beginning of the crushing season in the sugar ethanol and energy business. The business has shown a very good performance when compared to the same period of last year.

Despite having the same nominal crushing capacity, we have crushed 20% more cane than last year. You can see us saying that the efficiency enhancements and improvements generating in our cluster in Mato Grosso do Sul are paying off. In terms of energy, we have already $40 and 120,000 megawatt hours, 40% more than last year and soy at very effective price.

All this improvements are a direct consequence of the successful development of our operational teams we see without the drought, one of our primary focus. Regarding the expansion project, in the Ivinhema mill, which will have 3 million tons of nominal crushing capacity and consolidate our 10 million ton cluster in Mato Grosso do Sul construction is on time and on budget.

As regards to our sugarcane plantation, our planting phase have doubled compared to the last three years. We’ve already planted over 19,000 hectares this year and expect to continue planting at this pace which will allow us to crush at almost full capacity by 2015.

In our Farming and Land Transformation business, we are closing the 2013, 2014 season with - effect compared to last year. This is explained by higher operational efficiencies in our segments coupled with improved – with high return to their historical average.

We are now fully focused on the new 2014, 2015 campaign working on new planting, the performance in our operations and we are getting prices with contractors and our structural input suppliers.

Today, more than ever it’s highly important to be the lowest cost producer. Regarding our Land Transformation business, we continue to monetize part of our already transformed farms. During the quarter, we closed the transaction that represents a 28% premium to the Cushman & Wakefield independent appraisal.

This sales reflects the execution of our strategy of monetizing our fully developed portfolio to reallocate our capital efficiency and generate attractive returns from the invested capital for our shareholders.

I believe that our businesses are set on a good path. We are placing a lot of focus on continuing to improve efficiency in each one of our value chain allowing us to become the lowest cost per user in each one of our segments.

Now, I would like to ask Charlie to walk you through the main operational and the financial highlights of the quarter. Charlie, please go ahead.

Charlie Boero Hughes

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

On Page 3, I would like to start by explaining an important change regarding our adjusted EBITDA metric. Under IFRS accounting, the sale of our non-controlling interest in our subsidiary accounted for us an equity transaction with no gain or loss recognized in the consolidated statement of income.

Differences between the selling price and the book value are recognized in shareholder’s equity. This type of transaction had not been contemplated when the company originally defined its adjusted EBITDA in 2010.

Management believes that the sale of a controlling or non-controlling interest in a subsidiary, whose main underlying asset is farmland, is a key element in its Land Transformation business. These sales will allow the company to monetize the capital gains generated by the transformation of undeveloped or underutilized farmland, thereby enhancing return on invested capital.

Accordingly, we have decided to include the gains or losses from sales of non-controlling interests in subsidiaries in our adjusted EBITDA definition.

I would now like to move on to the Farming business. Please direct your attention to Slide 5, where we compare the rainfall of the ten harvest seasons with some of the previous harvests. That shows the monthly rainfall evolution for our farms in Pampas region.

The orange bar represents rain during the 2012 and 2013 crops and the green bar represents the 2013 and 2014 fall which has been recently added. Section 1 of the graph is an observed as the mean productive regions of Argentina, suffered lack of rain together with high temperatures from December 2013 to mid-January 2014.

Accordingly, some of our crops such as sunflower and early corn which were either a critical flowering or growth stage were slightly affected. Nevertheless in Section 2, you can see that the mid-January 2014 which was the end of March, rains normalized and we saw earnings to be at the historical level.

This allowed our crops to develop normally and generate an increase in mills and margins compared to the previous graph. Section 3, however, shows that higher than average rains between April and June low harvest fees for some of our results.

As a result, as of June, 89% of our planted area has been successfully harvested. The remaining 11% or 23000 hectares will be concluded during third quarter of 2014.

We will turn to Slide 6 of the presentation, where I would like to take a closer look into the harvested area and some of our most important crops. If you direct your attention to the top left corner of the page, you can see that as of June 30 of 2014, that was the harvest of soybean first crop was fully completed.

Moderate and timely rains from January through April allowed the crop to develop above expectations producing average yields of 2.9 tons per hectare, marking a 32% increase versus the previous harvest year. This allowed us to produce over 159,000 tons of soybean.

Moving on to the right, you may see that harvest of soybean second crop was 19% completed by the end of June 2014. Average yields reached 1.9 tons per hectare, 50% above the 2012 and 2013 harvest years.

The increase is driven as a result of a higher proportion of soybean second crop area being planted to the main productive region of Argentina and climatic conditions in line with historical averages contrasted to last year’s drought.

In the bottom left corner, you can see that at the end of the second quarter 2014, the harvested area for early and late corn totaled 29,000 hectares, or 64% of the total planted area.

Excessive rains between the end of March and June 2014 slightly delayed the harvest. The average yields obtained were at 6.0 tons per hectare, marking a 9% increase compared with the previous harvest year. As you may see in the pie chart, seeking to diversify our crop risk and water requirements, approximately 37% early corn was planted in September and 63% of late corn was planted during the end of November and December of 2013.

Early corn was affected by the lack of rainfall and high temperatures during December and early January, which occurred during the critical growth or flowering stage. The late corn however, received an adequate amount of rainfall during the January 2014, which allowed for normal crop development. As the harvest is completed during the fourth quarter of 2014, we expect corn yields to remain above the previous harvest year.

Lastly, on the bottom right graph, it kind of serves as of the end of June 30th of 2014, we harvested over 36,000 hectares rice was completed. The average yield in our rice farms was 5.6 tons per hectare, slightly below the previous harvest year. Supply of water in dams and rivers was sufficient to flood the rice fields throughout the crop's cycle.

However, during mid-February through April, higher than normal amount of cloudy and rainy days complicated harvest operations and had a negative impact on the yields at some of our farms given that the plant requires sunlight for photosynthesis and plant growth.

We expect yields to improve in the upcoming harvest years as we enhance operational efficiencies, develop our agricultural gains and continue the transformation process and zero-leveling of our rice farms. Zero-leveling is an agricultural practice based on GPS and Laser technology, resulting in reduced water irrigation requirements, and lower costs of labor and energy.

Let’s go to Slide 7 where I will discuss the financial performance for our Farming business. As you may see in this first chart, adjusted EBIT in the second quarter of 2014 increased by 18% to $14.3 million. However, I would like to focus on the year-to-date figures on the bottom chart they reflect our harvest results.

On a consolidated basis adjusted EBIT increased from $28.7 million in the first six months of 2013 to $48.4 million in the first six months of 2014, marking a 69% increase year-over-year.

This increase is explained by, higher yields generated by most of our crops and favorable climatic conditions in line with historical averages, contrasted to last year’s severe drought; a larger planted area of owned and leased land together with a lower area of second crop; and lower production costs driven by enhanced operating efficiencies coupled with the devaluation of the Argentine peso which is important to highlight that more than 75% of our revenue are dollar-denominated by only 40% of our crops are dollar linked.

Therefore the depreciation of the Argentine peso has a positive impact on our margins and our profitability. In the case of the Dairy segment the good performance year-over-year is primarily explained by the disposal of La Lacteo milk processing facility in second quarter of 2013, which generated a $2.4 million gain in the Dairy segment.

I would also like to point out that towards the end of June of 2014, Adecoagro begun planting activities for the 2014, 2015 harvest years. Within the end of June and early July, Adecoagro successfully planted 31,000 hectares of wheat in adequate conditions. The hectares planted have received good humidity which should allow the plant to develop normally.

If you could please turn to Page 9, I would like to discuss our Land Transformation business. On June 17, 2014, Adecoagro completed the sale of a 49% interest in Global Anceo S.L.U. and Global Hisingen S.L.U, two Spanish subsidiaries, for a total price of $50.6 million.

The main underlying assets of these subsidiaries are La Guarida and Los Guayacanes, two farms located in the Argentine provinces of Salta and Santiago del Estero, respectively. This transaction generated $25.6 million of Adjusted EBITDA in second quarter of 2014, representing a 28% premium over the Cushman & Wakefield independent appraisal dated September 2013.

In the last nine years, Adecoagro has been able to generate gains of approximately $185 million by strategically selling at least one of its fully mature farms per year. Monetizing a portion of its land transformation gains each year allows Adecoagro to redeploy its capital efficiently and continue expanding its operations by investing in other farms or assets across the agribusiness value chain with attractive risk-adjusted returns, allowing the Company to continue growing and enhancing shareholder value.

Let’s turn to Slide 11 and move on to our Sugar, Ethanol and Energy business. Let me start by taking a look at the monthly rainfall at Mato Grosso do Sul, compared to the monthly rainfall in Sao Paulo. Rains in Sao Paulo between January to July 2014 were significantly below the 15 year average between 8% to 10%.

According to market percentage, such as UNICA Adecoagro, there were significantly south regions expected to crush approximately 560 million tons of sugarcane, down from the 600 million tons which were expected before the drought.

Our operations in Mato Grosso do Sul were not affected by the drought, in fact, with this rain currently stands 3% above the 15 year historical average.

Let’s turn to Page 12 where I would like to discuss the sugarcane crushing for the period. I would like to remind you that Adecoagro’s sugar ethanol and energy mills begun the 2014 sugarcane harvest and milling operations during the beginning of the second quarter of 2014 with the exception of Angelica which began crushing in March 24 to maximize ethanol and energy production and capture the attractive prices at the end of the inter-harvest season.

Despite suffering some harvest disruptions at the beginning of the harvest due to excess rains, the increase in productivity allowed our mills to crush a total of 2.1 million tons of sugarcane in the second quarter of 2014, marking a 21% increase over the previous year.

This was possible as a result of the ramp up and consolidation of our consolidation of our cluster in Mato Grosso do Sul. The expansion of our sugarcane plantation and favorable during June which allowed us to increase the pace.

We will now turn to Slide 13, where I would like to discuss our planting activities for the present quarter. As you can see, in chart on the left, as of June 30 of 2014, our sugarcane plantation reached a 111000 hectares representing an 18% growth over the second quarter of 2013.

Expanding and renewing our sugarcane plantation continues to be a key strategy to supply our mills at full capacity and increase the productivity and quality of our plantation. Particular of the chart on the right, you can see that our sugarcane plantation planting phase has doubled compared to the last period.

We already planted over 19,000 hectares this year and expect to continue planting at pace which will allow us to price increase to a competitive cluster in 2015.

If you would please turn to Page 14, I would like to discuss the further productive indications relating to our sugarcane production. The first graph on the left shows that the adequate amount of rainfall in the Mato Grosso do Sul region between January and May of 2014, allowed for normal crop development driving sugarcane yields to 79.6 tons per hectare, marking a 6% increase over the second quarter of 2013.

The graph in the middle shows that TRS content increased by 1% to 120.8 kilos per ton. And the third on the graph on the far right, the combination of these two effects posting 7% increase in TRS content per hectare.

Please turn to Slide 15 where I would like to discuss the total production volumes for our sugar, ethanol and energy business. The 21% increase in change mean together with improvements we saw in our productivity indicators, our effort to significantly increase the production volume of our sugar ethanol and energy.

In the quarter, we produced 112,000 tons of sugar, 84,000 cubic meters of ethanol and 105,000 megawatt hour of energy. If you take a look at the graphs on the screen, you can see that total production of sugar, ethanol and energy has increased by 41%, 10% and 31% respectively.

I would like to highlight that our business have a 60% to 40% flexibility to adjust our production between sugar and ethanol in order to take advantage of more favorable market demand and prices at 7.2 times.

As you can see from the chart in the upper left corner, during the second quarter of 2014, 55% of the sugar content TRS was shifted towards ethanol production and 45% towards sugar. The mix favored ethanol in more attractive margin compared to the sugar during the quarter.

Let’s turn to Slide 16 of the presentation where I would like to start our sugar business. If you take a look at the graph on the left, we observe that our sugar sales volumes during the second quarter of 2014 going towards 75,000 tons marking a 2% decrease in the same period of the previous year.

With a crushing volume is a result of two main – our production favoring ethanol and a significant increase into our inventory. With regards to the second point, if you take a look at the chart in the middle of the screen, you can see that sugar inventories increased by 420%.

Sugar have already been committed at fixed prices and will be delivered in the upcoming month. As of June the 30th of 2014, we have 159000 tons of sugar at the 2.1 cents per pound of sugar equivalent.

The graph on the right shows that the decrease in sales volume, coupled with the fact that sugarcane prices fell from $446 per ton in the second quarter of 2013 to $396 per ton in the second quarter of 2014, resulted in a 13% decrease in total net sales. VHP prices has remained under pressure increasing by 12% primarily driven by lower demand and higher global sales.

Nevertheless Consulting groups such as Kingsman and Datagro are projecting a sugar deficit ranging 2.1 million and 2.5 million tons of sugar for the next season, which would be constructive for prices. This situation would be aggravated in the event of an El Niño weather occurring, as it would reduce sugarcane yields in Southeast Asia and cause a reduction in sugar availability for 2014 20115 harvest.

Accordingly, with this expected sales increase in the upcoming quarters as we sell off our inventory and continue trucking applicable.

If you could please turn to Slide 17, I will proceed to start our ethanol business. In the quarter, ethanol sales volumes reached 62,000 cubic meters, resulting a 4% increase over the second quarter of 2013.

The increase is primarily the result of the 21% increase in sugarcane crushed in the quarter and the ethanol carry strategy implemented during 2013 which resulted in higher inventory volumes for sale in first and second quarter of 2014.

Furthermore, seeing the renewal price disposal – at the beginning of the year causing hedging spreads to decrease by 7.8% and hedging spreads by 7.4% quarter-over-quarter, we implemented an ethanol price current clarity in May 2014 which resulted in the 6% increase of our ethanol vendors.

Price increase in petroleum, a 10% increase in ethanol prices in dollar terms which earned from a $609 per cubic meter in the second quarter of 2013 to $560 per cubic meter in the present quarter and an increase in our ethanol inventory volumes in the quarter caused net sales to decrease 26%.

If you take a look at the chart on the far right, you can see that Adecoagro's net sales in the second quarter of 2014 fell to 34 million from 36 million in the second quarter of 2013.

Let’s turn to Slide 18 of the presentation where I would like to discuss our Energy business. I would like to say that hydropower in Brazil generate 80% of the accounted electricity. Several things to be – in the winter and in the rainy season between December and March.

However, because most of the south and Midwest of Brazil experienced below average rainfall between November 2013 and March 2014, water levels in Brazil hydroelectric reservoirs were not able to be replenished.

Despite having above average rain in April and May, which managed to build up some of the reservoirs, if you take a look at the graph on the top left, you can see that the reservoirs in the Southeast and Midwest of the country, which represents 70% of the country’s water supply remain at a 36% capacity compared to 63% of last year.

The generating demand is increasing oil fueled power plants have been operating at full capacity in order to mitigate the drop in electricity supply. If you take a look at the table in the top right, you can see that lack of Lack of rainfall throughout April and May allowed energy spot prices to remain at very close to the price received 822.8 Real per megawatt hour, the maximum rate authorized by the government.

In April at 822.8 Real per megawatt hour and May. In June, however, after rains throughout the southern region of the country causing water storage levels to increase to 96%, spot prices were lower to 412.7 Reais per megawatt hour. And at the left, 70% of the country’s water supply remains below 40% capacity we should expect prices to remain at attractive levels in the upcoming months.

The graph on the bottom left shows that energy sales volumes during the quarter increased by 26%, reaching a 105,000 megawatt per hour. The increase in the energy as a result of a 21% increase in our crushing capacity which allowed to us maximize the use of our high pressure steam boilers at our three mills and higher efficiencies and combustion ratios in our boilers.

Accordingly, if you take a look at the graph, in the bottom right, you can see that the increase in sales volume, together with a 42% rise in the energy prices that we captured gross total net sales for the quarter were $13.3 million, marking a 79% increase over the second quarter of 2013.

Modern and efficient high-pressure steam boilers at our three mills coupled with the fact that 8% of our energy volumes on the current year remain a hedge and subsequent hike for prices expected to grow by at high margin and profitability during the year.

Please turn to Slide 19 where I would like to analyze the financial performance of our sugar ethanol and energy business.

If you take a look at the graph on the top left, considered on an aggregate basis, net sales for the quarter decreased by 1% to $77 million. Our energy net sales was significantly higher in the second quarter of 2014 on account of higher cogeneration productivity and higher prices, financial performance during the quarter was primarily offset by lower sugar and ethanol prices and have increased to sugar and ethanol inventories.

I would like to say that despite the decrease in net sales, operational performance during the second quarter of 2014 was significantly stronger than the previous last year. Performance was enhanced by a 6% increase in sugarcane mills, favorable weather conditions, the ramp up and consolidation of our cluster in Mato Grosso do Sul which resulted in higher milling efficiency per hour and operational synergies and efficiencies which reduced our production costs.

As a result of the above, if we take a look at the graph on the upper right, you can see that adjusted EBITDA in the second quarter of 2014 reached $35.6 million, 38% higher than the second quarter of 2013. Adjusted EBITDA margin also expanded reaching 46% from 33% in the second quarter of 2013.

The graph on the bottom left shows that on a cumulative basis, net sales during this first six months of 2013 increased by 7% compared to the first six months of 2013 on account of more cane crushed, our ethanol carry strategy during 2013 which resulted in higher inventory volumes for sale in the first quarter of 2014 and our ability to turn-on the boiler early at the Angelica mill to cogenerate electricity and capture the highly attractive energy prices.

While operational and financial performance improved year-over-year, the graph on the bottom right shows that adjusted EBITDA in the first six months of 2014 decreased by 3% to $39.4 million.

The decrease was the result of; $2.4 million unrealized gains in the first six months of 2014 resulting from the mark-to-market of our sugar derivative hedge position, contrasted by a $7.8 million unrealized gain in first six months of 2013. Adecoagro expects operational and financial performance to continue improving during 2014 as the harvest advances throughout the third and fourth quarters of 2014.

If you turn to Page 20, I would like to give you an update on the construction of the second and final phase of the Ivinhema Mill which will add 3 million tons of nominal crushing capacity and consolidate our 10 million ton cluster in Mato Grosso do Sul.

The construction is progressing slightly ahead of schedule and on budget regarding capital expenditures. We are currently in the process of assembling the second boiler, the ethanol distillery and the power substation, and are closely monitoring the manufacture and delivery of key equipment parts. We expect phase II to commence crushing activities by the start of the start of the 2015 sugarcane harvest.

I would now like to move on to our financial performance. Please turn to Page 22; you can see that on a consolidated basis, Adecoagro recorded $72.8 million of adjusted EBITDA marking a 76% increase over the second quarter of 2013. Adjusted EBITDA margin for the quarter were 37% compared to 22% in the second quarter of 2013.

On a consolidated basis, the first six months of 2014 adjusted EBITDA was $107.5 million, 52.6% higher than the first six months of 2013. Adjusted EBITDA margins also grew reaching 36% in the first six months of 2014, a proposed to $0.24 in the six months of 2013.

Lastly, I would like to ask you to please turn to Page 23. If you take a look at the graph on the top left, you can see that as of June the 30th of 2014, Adecoagro's gross indebtedness was $783 million, 1.0% lower than the previous quarter. The Farming business then was reduced by a total of 45.6 million or 32% primarily through proceeds generated by our Land Transformation transaction.

As a result outstanding debt in the Farming business remained at $95.6 million. For sugar ethanol and energy business, outstanding debt increased by 6%, long-term debt and short-term debt increased by #23.5 million and $14.4 million respectively primarily to finance the construction of the second phase of the Ivinhema mill which is expected to be fully operational at the start of the 2015 harvest season.

Cash and equivalents as of June the 30th of 2014 was $199 million, 19% lower than as of March 31 of 2014. In terms of the decrease in outstanding debt and the reduction in cash, net debt during the second quarter of 2014 increased by 7% compared to the first quarter of 2014 reaching a total amount of $583 million.

If you take a look at the graph on the upper right, you can see that on a consolidated basis, our debt maturity profile has improved as we shifted a portion of our short-term debt into the long-term. As of June 30 of 2014, 83% of our debt is in the long-term from loan from multinational banks such as the BNDES, Banco de Brasil and the Inter-American Development Bank.

Finally, I would like you to direct your attention to the chart in the bottom left which reflects our debt term structure. We currently have 45% of our debt in dollars, 1% in Argentine peso, and 54% in Brazilian Reais.

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

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. (Operator Instructions) The first question comes from Isabella Simonato with Bank from America Merrill Lynch. Please go ahead.

Isabella Simonato - Bank of America Merrill Lynch

Hello, good morning everyone. Thank you for taking questions. I would like to know more of the - what’s your view on the 2015? Are you considering the more challenging scenario for great margins – but at the same time, the expectation of a weaker peso and also the output for crops for the next season? Thank you.

Mariano Bosch

Hi, Isabella, this is Mariano. As you mentioned, a weaker peso is a positive thing for our business. So that is the good part of our expectation for our next term. And then, of course, prices of commodities are more challenging.

As you’ve seen in our reports, 80% of our corn is already hedged, that has already been fixed at a much higher price and generated prices and more than 50% of our soybeans that are our main crop. In rice, we are not seeing that decrease is prices, so, in rice because our important crop, we will continue to see similar prices to what we’ve been having.

So we don’t so see a reduction there and we do see all the benefits of a weaker peso as we just discussed. And against here, the most thing that Charlie was mentioning and as I was also mentioning is the negotiations and all the discussions we are having today with our suppliers, contractors and all that part of the game.

And within that discussion, it is not also important the agronomic part and the sustained financial model and to continue to have this operational efficiencies that year-by-year we continue to improve. Today, it is also important all this financial aspects of the negotiation.

So today, we are focusing in examples like buying inputs, today, that we are going to be paying in 270 days, 16 pesos. So that’s part of the strategies we are using to reduce our general costs. In general, I think we are feeling we are being competitive in the cost that we will be achieving for our next crops and we feel comfortable with the hedges of our main crop.

Isabella Simonato - Bank of America Merrill Lynch

Great, thank you very much.

Operator

Thank you and the next question comes from Ravi Jain with HSBC.

Ravi Jain – HSBC

Hi. A little more on the strategy side and you continue to sell land in Argentina. What is your plan to reallocate this capital? And my second question is, how do you see farm land prices in the next 12 to 18 months, both in Argentina and in Brazil, given the softer commodity prices that we should expect? Do you expect to buy more land in Brazil or other parts of the region? Thank you.

Mariano Bosch

Hi, Ravi. Yes, sure. On the first part of your question, we are allocating this capital of the sale of the farm paying back dollar-denominated debt that’s most of what we’ve done with the capital that we are receiving from the sale of the farm. And on the second part of your question, regarding farm land prices in general, I would say that there are two main sources.

The lower commodity prices make farm land in general moved that one. And then, a weaker peso or a weakened currency for the local currencies in the country makes the farm land – the yields of the farm land better. So, that plays against making farmland prices going higher.

So, in Argentina in particular with higher devaluation that made prices tend to move higher because of a higher returns that we are making on your part. But, regarding what we are doing, we are very specific on each particular deal. So, it always depends on the returns we are expecting for each particular farm when we are negotiating for buying and selling.

So, there we see in most of the deals that we are negotiating and we always have open negotiations in terms of farms all over the region. We are not reaching the prices or the expectations on the returns on investment that we are or the IRRs that we are looking for the allocation of our capital.

So, it will depend on every specific transaction. As you know, we are looking transactions in Brazil, Argentina, and also some other countries where we are not where we currently are not present there that product-wise. Bolivia and Columbia. So those are countries we are often visiting and trying to make this.

Ravi Jain – HSBC

Thank you. That’s helpful.

Operator

Thank you and the next question comes from (Inaudible)

Unidentified Analyst

Hi, good morning everyone. My question is regarding the sugar and ethanol business. We know that the company had the strategy to carry ethanol into the next quarter and in fact if we look at the crushing in the quarter and in the first half of the year, it increased 20% compared to a year ago and when you look at sugar and ethanol volumes, it do not increase at the same pace.

And my question is, at what price premium you would expect to sell this ethanol inventory compared to the selling prices that you have during the second quarter? Thanks.

Mariano Bosch

Hi, Rodrigo. I am going to ask Marcelo Sanchez our Commercial Director to answer your question. Marcelo?

Walter Marcelo Sanchez

Hi, Rodrigo, yes, even though the pace of the crushing at the first quarter was higher compared year-on-year we still think that the crushing volume will be lower and then the increase in the ethanol price is expected and we are currently foreseeing a possible range between 100 Reais and 160 Reais per cubic meter above cumulative.

Unidentified Analyst

That was helpful. Thank you Mr. Mariano.

Operator

Thank you. (Operator Instructions) And the next question comes from (Inaudible)

Unidentified Analyst

Yes, hi, thank you for taking my question. Just wanted to know if you could please give us – again you saw an updated guidance in terms of your cane crushing and sugar and ethanol volume capacity over the next two three years given the updates in your new Ivinhema mill and other updates across the company.

Charlie Boero Hughes

Sure. On the end of the season of 2014, our nominal crushing capacity for 2014 is 7.2 million tons in total and we feel or we have the cane to be very close to the full capacity. So, it will depend on how many rainy days or not rainy days we will end up having this 2014 year, but we feel very comfortable to reach the full crushing capacity.

And for next year, we will be increasing the 3 million tons our crushing capacity. So, 2015 is where we see the 11.2 million tons of crushing capacity. But we don’t foresee being full crushing capacity at that time, that is why we’re pointing out in the presentation than the planting is doing great.

So we will be closer that we probably won’t reach full capacity of the 3 million of the three additional million tons of crushing capacity will be reached in 2016. So that – our expected projection or guidance with regard to the real milling that we will be having in the future.

Unidentified Analyst

Understood. So as you say, 7.2 plus 3?

Charlie Boero Hughes

Yes, exactly.

Unidentified Analyst

Okay, that’s lovely. Okay, okay and do you think you would remain with the mix along that 45% 55% ethanol sugar or how dynamic is that mix?

Charlie Boero Hughes

Yes, that dynamic for the 2015 year – for 2014, I see that we will continue within more or less within the same. For 2015, we can change 60%, 40% is the maximum flexibility that we can have either side. So we see much higher prices of sugar, we will maximize sugar if we see higher prices of ethanol, we will maximize ethanol. Today, we are maximizing ethanol according to the current prices.

Unidentified Analyst

Excellent. Thank you very much.

Operator

Thank you and the next question comes from Santiago Ruiz with Raymond James.

Santiago Ruiz - Raymond James

Hi, Mariano, hi, Charlie, thanks for the questions. My question is regarding your share repurchase program. How aggressive do you expect it will be and then next month where are you with this?

Charlie Boero Hughes

Sorry, Ruiz, what’s the question on the share buyback?

Santiago Ruiz - Raymond James

Yes, how far do you expect to be in the sense progress – in the next month regarding the share buyback?

Charlie Boero Hughes

Okay, Santiago, as we mentioned in the earnings release, we will expand the program. But it will depend on – depending on our expected returns we will be deciding whether to buy or not in a monthly basis.

Santiago Ruiz - Raymond James

Thank you.

Operator

Thank you. And the next question comes from Thiago Duarte with BTG.

Thiago Duarte - BTG Pactual

Hi, thanks for taking the question and good morning everybody. A question on the land transformation and the sale that you announced for the quarter and I assume that you sold the 49% minority stake in the two subsidiaries that control the farms, the farming in Argentina. Just want to clarify why did you sell minority stake and not the totality of the farms and if there is a plan for any impediment for that to happen based on your land transformation strategies that we have seen in the past? Thank you. Hello.

Charlie Boero Hughes

Yes, Thiago. There is no impediment to sell 100% or 49%. This was a particular case where there was an investor willing to buy 49% and he was willing to – have us being the operator of the farm and continue farming this farm. So we thought that was an interesting deal for us and we will continue to operate that farm.

Thiago Duarte - BTG Pactual

Perfect, thank you.

Operator

Thank you. (Operator Instructions) And the next question comes from Vincenzo Paternostro from Credit Suisse.

Vincenzo Paternostro – Credit Suisse

Hi, everyone. Thank you for the question. My first question is, on sugar price, when do you expect sugar prices recover? What’s your view on sugar price for this season and for the next season?

And my second question is, I’d like to understand whether you plan to publish a new land portfolio appraisal in the short-term and if so, what’s the appreciation of land you are expecting to have?

Charlie Boero Hughes

Hi, Vincenzo. I am going to answer your second question and then I want to pass a word to Marcelo Sanchez to answer your first question. So regarding the new land appraisal, yes, we will – during every September, Cushman & Wakefield makes independent appraisal and that will be released in our November earnings release. So, that is how we always do it and we will continue doing the same way this year.

What do we expect on that evaluation with normal contribution in that evaluation, but as I mentioned before regarding prices of land in general, there are forces flowing in different ways. So, let’s see what we can see from them. And then, on your first question regarding the sugar prices and what we will expect there, Marcelo, can you answer this question?

Walter Marcelo Sanchez

Yes, Vincenzo, good morning. Regarding the expectation for this year, for prices, as you may know – prices are really under pressure and last rainy day was – it was a very strong support at the 16 level and below that level for October.

We are seeing that as the crushing in Brazil will be developing, crushing will be ending up before expectation due to the damage that drought affected – set this now for action and I think that the prices are still reacting under the lack of the month within this 12 months.

And we could see prices pressure until November, December this year. But certainly, we are expecting a recovery in prices for March, July next year and it has to say the impact on that, but certainly we see better prices for 2015.

Charlie Boero Hughes

Okay. Thank you.

Operator

This concludes the question and answer section. And at this time, I would like to turn the floor back to Mr. Bosch for any closing remarks.

Mariano Bosch

So what you have noticed, we have a year full of challenges in all of our business segments. We are determined to continue in our growth path, but at the same time be very disciplined in maintaining our low cost of production. So this is our commitment creating value and generating attractive returns for our shareholders through the development and operation of a sustainable production model. Thank you very much for joining the call and look forward to speaking with all of you soon.

Operator

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

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