Adecoagro's (AGRO) CEO Mariano Bosch on Q1 2014 Results - Earnings Call Transcript

| About: Adecoagro S.A. (AGRO)
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Adecoagro S.A. (NYSE:AGRO) Q1 2014 Earnings Conference Call May 15, 2014 8:30 AM ET


Mariano Bosch – CEO

Charlie Boero Hughes – CFO


Isabella Simonato – Bank of America Merrill Lynch

Enrico Grimaldi – BTG Pactual

Giovana Araújo – Itaú BBA

Vincenzo Paternostro – Credit Suisse

Ravi Jain – HSBC Securities

Walter Marcelo Sanchez


Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro’s First Quarter 2014 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 your conference.

Mariano Bosch

Good morning, everyone, and thank you for joining our call. The first quarter of 2014 has shown very good results in all our business lines.

Our Crops, Rice and Dairy businesses have started to generate attractive returns. Our discipline of maintaining an efficient cost structure allows us to capture gains and synergies of our high-quality asset base and a sustainable business model focused on returns.

In the Rice business, although weather and ongoing works of land transformation of our farms have not allowed us to increase yields decision. We have consummated improvements in our operational efficiencies and production costs, after we stalled [ph] of our investment in zero-level technology and our focus on agriculture and industrial excellence.

In Dairy business, the second free-stall is almost at full capacity. Milking cows are rapidly adapting to this new production system. Productivity per cow is consistently increasing quarter-after-quarter, and we are confident we would be able to reach our highest performance metrics soon.

The Dairy business is generating attractive returns and we see good opportunities to continue growing in this business.

Finally, in the Crop business, although we had a dry November and December, our sustainable model focused on long-term solid productivity on agriculture and cost efficiency on a hectare-by-hectare basis and our multi-diversification strategy have allowed us to harvest good crop yields.

In the Sugar, Ethanol business, we are starting a promising year. The first quarter is known as the off-season, generally used to the maintenance of our mills. But we have been very active executing our ethanol carrying strategy, cogenerating electricity at effective energy prices, planting sugarcane to supply our growing capacity at the Ivinhema mill, and our agriculture and industrial teams have continued their training process and are ready to continue enhancing operational and productive efficiencies.

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

Charlie Boero Hughes

Good morning, everyone, and thank you for joining Adecoagro conference call for the first quarter of 2014. I would like to walk you through a few slides that reflect the main operational and financial highlights of the quarter.

Let’s move ahead to Page 2, where I will analyze the impact of the weather on our Farming business. The chart shows the monthly rainfall evolution for our farms located in the humid pampas of Argentina. The green bars represent rainfall during the 2012 and 2013 crop, and the orange bar represents the current 2013 and 2014 crop.

As I’ve showed in the chart, the main productive regions of Argentina suffered lack of rains together with high temperatures from December 2013 to mid-January 2014. However, since mid-January 2014, rains have normalized and returned to their historical levels.

Our sustainable production model based on no-till farming, crop rotations, balanced fertilization and integrated pest management has allowed our farms to mitigate the abnormal weather during November and December and we captured efficiency gains.

As a result, crops have been able to develop as expected, generating an increasing yields and margins compared to the previous crop.

Moving onto Page 3, I would like to give you an update regarding the harvest of our main crops. As you may see on the upper left chart, as of the end of April 2014, the harvest of rice was almost completed, reaching 94% of total planted areas. Harvested yields were 5.7 tons per hectare, in line with the previous harvest year but below our expectations. 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 had a negative impact on 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 continue with the transformation process and zero-leveling of our rice farms.

Let’s move to corn in the upper right chart. The harvested area for corn as of April of 2014, totaled 11,000 hectares or 24% of the total planted area. Seeking to diversify our crop risk and water requirements, we planted different corn seed varieties at different planting needs [ph]. Early corn varieties were planted in September and late corn was planted during the end of November and December of 2013.

The early corn was negatively affected by the lack of rainfall and high temperatures during December and early January, which occurred in the flowering phase or critical growth period. The late corn areas however have received an adequate amount of rainfalls as of January 20, which allowed for their normal development of the crop.

Harvesting for late corn will begin in mid-May and is expected to offset the yield reduction in the early corn crop. In aggregate, we expect corn yields to be above the previous harvest year.

In the bottom left chart, you may find the status of our soybean crop. As of the end of April of 2014, we harvested 36% of the soybean crop. Harvest is developing on schedule. Moderate and timely rains from January through March have allowed the crop to develop above expectations. We have currently generated yields of 2.9 tons per hectare and expect final yields to be above the previous harvest season.

Lastly, regarding soybean 2nd crop, harvesting started during the last days of April of 2014 but the bulk of the harvest will occur during the mid-May. Normalized weather experienced during February has allowed the crop to develop above expectations. At the end of April, 14% of the area has been harvested obtaining yields of 2 tons per hectare or 43% above the previous harvest year.

As we continue to harvest the crop, we expect yields to stay higher compared to previous harvest year.

Moving onto Slide 4, I’d like to analyze the financial performance for our Farming business. Adjusted EBIT for Crops segment increased to $20.6 million in first quarter of 2014 from $14.1 million in first quarter of 2013. 45.8% growth is primarily explained by higher yields and lower production costs, driven by efficiency gains and the devaluation of the Argentine peso, which diluted our peso costs measured in dollar terms.

And with Rice segment, adjusted EBIT totaled $12.1 million in the first quarter of 2014, making that 269% increase versus the first quarter of 2013. This growth is explained by a larger harvesting area and lower production costs, driven by the implementation of zero-level production technology and the depreciation of the Argentine peso.

In case of the Dairy segment, adjusted EBIT grew to $1.4 million in the first quarter of 2014 compared to slightly negative in the first quarter of 2013. This increase is explained by a 12.1% increase in our dairy cow herd, driven by the ramp up of the second free-stall dairy facility and enhanced by a 10.4% increase in cow productivity. Average productivity grew from 30.3 liters per cow per day to 33.5 liters in the first quarter of 2014.

Operational performance during the quarter was offset by a 7.1% decrease in milk prices, which fell from $0.42 per liter in the first quarter of 2013 to $0.39 per liter in first quarter of 2014. Production costs per liter of milk produced decreased by 16% driven by the increase in productivity and the devaluation of the Argentine peso, and offset by higher costs resulting from a larger cow herd. As a result, adjusted EBIT in the first quarter of 2014, reached $1.4 million, marking a significant increase to the first quarter of 2013.

The operational enhancements in the Crops, Rice and Dairy segments were offset by an unrealized loss related to the mark-to-market of our crop derivative hedge positions in the first quarter of 2014 contrasted to a $2.8 million gain in the first quarter of 2013.

In conclusion, consolidated adjusted EBIT for our Farming segment grew from $16.5 million in the first quarter of 2013 to $34.1 million in the first quarter of 2014, marking the 106% increase.

Let’s turn to Slide 5, and move on to our Sugar, Ethanol and Energy business. We will start by analyzing the monthly rainfalls at our cluster in Mato Grosso do Sul compared to rains in the State of São Paulo. As you may see in the charts, rains during January and February in the cluster has been very close to the historical average, while rains during March and April have exceeded the historical average.

The good level of rains received during the first four months of the year has allowed our share in plantation to recover from the drought experienced during November and December of 2013. In the case of São Paulo, the major working region in Brazil, rains during 2014 have been significantly lower than those in Mato Grosso do Sul and below the 15-year historical levels for the State.

As a result, the center sub-region is expected to reduce its productivity, which may have an impact on Brazilian sugar exports on the worlds’ prices.

Let’s turn to Page 6. I would like to highlight that in the Sugar, Ethanol and Energy business, the first three months of the year are commonly known as the inter-harvest season. During this summer months due to very favorable growth conditions, sugarcane plant growth is stimulated and less energy is stored in the form of sugar. As a result, mills suspended their crushing activities, while equipment and machinery undergoes maintenance in preparation for the upcoming harvest year.

During the first quarter, mills also focus on the renewal and expansion of their sugarcane plantations.

The chart on the left shows that during the first quarter of 2014, we planted a total of 9,600 hectares of sugarcane, 50% higher than the area planted in the first quarter of 2013. Of this total area, 5,500 hectares corresponds to new areas planted to supply additional sugarcane to our cluster in Mato Grosso do Sul, which is expected to reach 5 million tons of nominal capacity in 2015, with the expansion of the second phase of the mill, and 4,100 hectares were planted to renew old plantations with newer and high-yielding sugarcane, in order to maintain the productivity of our plantation. The increase in planted area was accomplished as a result of higher planting efficiencies and favorable weather.

The chart on the right shows that as of March 31, 2013, our sugarcane plantation consisted of 140,000 hectares, representing a 19% growth year-over-year. Sugarcane planting continues to be a key strategy to supply our mills with quality raw material at low cost.

Let’s move onto Slide 7, where I would like to discuss our strategic ethanol carry. As you may see in the chart, ethanol prices reached their lowest levels during August 2013, which is the peak of the sugarcane harvest. As a result of oversupply of ethanol at harvest, hydrous prices fell to BRL 1,085 per cubic meter.

On that time, we decided to reduce our monthly sales volumes and started storing ethanol in our storage tanks of the mills in order to capture higher prices during the harvest season. As a result, by the end of 2013, we had ethanol inventories of 74,000 cubic liters.

Ethanol prices continued increasing during the harvest season, mainly as a result of a decrease in ethanol supply since mills weren’t operating during the inter-harvest period, and more competitive hydrous pricing versus gasoline at the pumps increased demand.

As we may see in the chart, hydrous ethanol prices appreciated from January through March, reaching over BRL 1,430 per cubic liter. Ethanol prices were not only higher quarter-over-quarter, but were also 13% higher year-over-year in reais terms.

The current strategy allowed us to capture significantly higher prices for our ethanol production and increase our margins and return on invested capital.

As you may see on Page 8, the increase in ethanol inventories drove our sales volumes to increase by 24% and the net sales in dollars to increase by 10%, offset by the depreciation of the Brazilian reais.

Let’s turn to Slide 9 of the presentation, where I would like to discuss our Energy business. I would like to start by highlighting that hydropower is Brazil’s main source of electricity and accounts for almost 80% of all electricity generation.

If you take a look at the graph on the top left, you will see that reservoirs in the Southeast and Midwest of the country, which represent 70% of the country’s water supply, were at 36% of their water storage capacity by March of 2014. Reservoirs tend to be depleted in the dry winter and later refilled in their ranges in between December and March. However, because most of Southeast and Midwest of Brazil experienced below-average rainfall between November 2013 and March of 2014 and growing demand, water levels in Brazil’s hydroelectric reservoirs were not able to be replenished.

As a result, in the February and March of 2014, reservoirs reached their lowest levels since 2001. With the dry winter approaching and energy demands increasing, fossil fuel reserve power plants have been operating at full capacity, in order to mitigate the fall in electricity supplies.

As a result, if we take a look at the table at the top right, you will see that from the beginning of February, energy spot prices have been trading at BRL 822 per megawatt hour, which is the maximum rate authorized by the government. These prices compared to BRL 414 per megawatt hour and BRL 215 per megawatt hour recorded in January and February of 2013, and to an annual average of BRL 263 per megawatt hour in 2013.

In order to capture this highly attractive energy prices, on March 7 of 2014, we turned on the boilers at our Angelica mills to cogenerate electricity by burning the stockpile of bagasse leftover from the previous harvest.

The chart on the lower left shows that we produced a total of 15,300 megawatt hours in the first quarter of 2014, marking a 607% increase compared to the first quarter of 2013.

The chart on the lower right shows that the increases in sales volumes, coupled with increase in energy prices, boosted our energy net sales over 1000% year-over-year.

I would now like to move to Slide 10, where I would like to analyze the operational performance of our Sugar, Ethanol and Energy business. The graph on the top left shows that net sales in the first quarter of 2014 reached $48.5 million, 22% above the first quarter of 2013.

As discussed in the last two slides, the growth in net sales was primarily driven by our ethanol carry and our ability to capture the current peak energy prices.

As you may see in the top right chart, that gross profit from manufacturing activities increased 11%, driven by the increase in net sales and partially offset by higher production costs.

Despite the growth in net sales and gross profit, if you take a look at the graph on the bottom right, you will see that adjusted EBITDA decreased to $3.8 million in the first quarter of 2014 from $14.9 million in first quarter of 2013. The main explanation for this reduction is our sugar hedge position.

As you may see in the bottom left chart, our sugar hedge position generated $1.4 million loss in the first quarter of 2014, compared to a $9.6 million gain in the first quarter of 2013. As of March 31, 2014, we have hedged 152,000 tons of sugar representing approximately 35% of our estimated production at an average price of 18.4 cents per ton.

And sugar prices continued to be driven by the gradual volatility [ph] in the center sub-region [indiscernible] of our hedge position generated a loss. However, approximately 65% of our production is unhedged and will be sold at the higher market prices.

Adjusted EBITDA was also affected by an increase in sugarcane crop treatment expenses. Crop treatment increased by 11% from $6.7 million in the first quarter of 2013 to $7.5 million in the first quarter of 2014 driven by increasing the size of our plantation.

We will now turn to Page 11, which shows the evolution of Adecoagro’s consolidated operational and financial performance. On a consolidated basis, net sales decreased year-over-year from $102.9 million in the first quarter of 2013 to $94.5 million in the first quarter of 2014. This 8% decrease was brought about by a 27% decrease in sales from our Farming business, and offset by a 22% increase in sales from the Sugar, Ethanol and Energy segment.

Given though that sales were lower year-over-year, adjusted EBITDA in the first quarter of 2014 totaled $34.7 million, representing a $5.7 million or 19.70% increase compared to the first quarter of 2013.

Adjusted EBITDA margins in the period increased from 28.2% to 36.6%. We expect Adecoagro’s production volumes and financial performance to continue growing, mainly driven by the ramp up of the Ivinhema mill and the increase in operational and financial efficiencies in each of our businesses.

Let’s move onto Page 12. The chart on the top left shows that as of March 31, 2014, Adecoagro’s gross debt stand at $790 million, marking a 20% increase to the previous quarter. Debt related to our Farming business increased by $30 million, marking a 17% increase quarter-over-quarter. And debt related to our Sugar and Ethanol business increased by $109 million, marking a 20% increase quarter-over-quarter.

In the Farming business, short-term debt increased by 20%. From a seasonality point of view, the first quarter is the one that requires the highest working capital, since all of our crops are planted and most costs incurred, because only a small amount of the crops have been harvested and sold. As of the end of the quarter, we expect to reduce working capital and debt as we continue harvesting and selling throughout the second and third quarter.

In the Sugar, Ethanol and Energy business, long-term debt increased by 25%. On March 25, 2014, we entered into a syndicated loan with ING Bank in an amount equal to $100 million, with a 4-year tenor and bearing an interest rate of 3-month LIBOR plus 4.20%. The loan will be used to finance the construction of the second phase of the Ivinhema mill, which will expand milling capacity to 5 million tons per year by 2015.

I’d like to highlight that on a consolidated basis, our debt maturity profile has improved as we checked in a portion of our short-term debt to long-term debt. If you take a look at the graph on the top left, you can see that 80% of our debt is in the long-term, composed mainly of loans from multinational banks such as the BNDES, Banco do Brasil and the Inter-American Development Bank.

Thus the total cash as of March 31, 2014 was $247 million, 7% above the fourth quarter of 2013. As a result of the increase in outstanding debt and cash, net debt as of March 31 of 2014 was $542.7 million, a $114.7 million above the fourth quarter of 2013.

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

Question-and-Answer Session


Thank you. The floor is now open for questions. (Operator Instructions) Please hold while we poll for questions. The first question comes from Isabella Simonato with Bank of America. Please go ahead.

Isabella Simonato – Bank of America Merrill Lynch

Thank you. Good morning everyone. My question is related to CapEx and debt. I understand that you anticipated the second phase of Ivinhema. So I was wondering, what’s the target leverage for the year-end of 2014, and what is the CapEx estimated for the year? Thank you.

Mariano Bosch

Hello Isabella, this is Mariano. I will ask, Charlie Boero, our CFO to answer your question.

Charlie Boero Hughes

Hi Isabella, the target for the year is an investment in the Sugar and Ethanol business with the construction of the second phase of Ivinhema. We are projecting to spend $250 million in total. This is considering the industry Ag equivalent and the planting.

Isabella Simonato – Bank of America Merrill Lynch

This is only for the Sugar and Ethanol?

Charlie Boero Hughes

Yes, exactly. This also includes the amount in CapEx for those industry and the renewal of the sugarcane.

Isabella Simonato – Bank of America Merrill Lynch

And regarding the leverage, the net debt-to-EBITDA and what is the target for the year?

Charlie Boero Hughes

We do not give guidance as you know, but we estimate that we will be in a range of 2.6 to 2.8.

Isabella Simonato – Bank of America Merrill Lynch

Good. Thank you.


The next question comes from Enrico Grimaldi with BTG. Please go ahead.

Enrico Grimaldi – BTG Pactual

Hi, good morning everyone. My question is regarding new energy business. Can you just remind us how much of contracted energy do you have and at what price, and how much you can sell in the spot market as a whole? And also how will this breakdown for the first Q specifically. I mean how much was contracted sales and how much was sold in the spot market, and if you could share with us the prices regarding the spot market in this Q, I would appreciate it. Thank you.

Mariano Bosch

Hello Enrico, this is Mariano. For the first part of your question, that is how much we have already contracted and how much we did have to contract. We do have 60% of our energy for this year, 2014, that has the long-term contract. Already it’s part of the long-term contracts that are in an average price of BRL 210 per megawatt.

Then we have another 20% that has been already contracted for this year. That is in around BRL 345 per megawatt. And then we have the last 20% that is being sold at the spot market, and will be sold during the year at the spot markets whatever that is, that today is BRL 822 [ph].

And then particularly for the quarter that you were asking specifically, how much was sold at the different price. We had 18% sold at BRL 600 per megawatt, 40% sold at BRL 822 and 39% sold at BRL 181 that was our regional long-term contract. That was for 15,000 megawatt hours.

Enrico Grimaldi – BTG Pactual

Great. Thank you very much.


Thank you. (Operator Instructions) The next question comes from Giovana Araújo with Itaú BBA. Please go ahead.

Giovana Araújo – Itaú BBA

Hi, good morning. My question is also about the energy sales. Looking 2015, do you have an idea how much sale – how much energy you have available for sale in spot markets in 2015, already taken account on top of [ph] Ivinhema mill in volumes megawatt hour?

Mariano Bosch

Giovana, this year we are projecting, in average 400,000 megawatt hour for the whole year. And for 2015, we are projecting a 570,000 that includes the grow-out of the Ivinhema mill and the second phase of the Ivinhema mill. Within that growth, we already have contracted 250,000 megawatt hour. So it’s less than 50%.

Giovana Araújo – Itaú BBA

Okay, perfect. And do you plan to – okay, do you plan to participate in any energy auction this year?

Mariano Bosch

Yes. We are analyzing those energy auctions. Depending on the price, we may take advantage and participate. We are thinking on the A minus one, and to participate on those one, we don’t like too much the A minus zero, because we think that spot prices this year will continue attractive, so we don’t want to lose the spot prices of this year.

Giovana Araújo – Itaú BBA

Okay, perfect. Thank you.


(Operator Instructions) The next question comes from Vincenzo Paternostro with Credit Suisse. Please go ahead.

Vincenzo Paternostro – Credit Suisse

Good morning everyone. My question is on land market in Argentina. Have you seen any impact on land price as a consequence of the huge depreciation of Argentina pesos? That’s my question. Thank you.

Mariano Bosch

Hello Vincenzo, this is Mariano. Yes, we do see some impact on the land prices, because of the devaluation and this is positive income. Land is now generating more dollars per hectare, so that’s why prices of land have slight increase in dollar, when you think about land prices in Argentina.

Vincenzo Paternostro – Credit Suisse

Thank you.


Thank you. (Operator Instructions) The next question comes from Ravi Jain with HSBC. Please go ahead.

Ravi Jain – HSBC Securities

Hi good morning. I had a couple of questions on the sugar, ethanol front. What is your view on the rough takes [ph] of an increasing in the ethanol blend to 27.5%? And when do you expect to see a meaningful fuel price increase? Will it be at the end of this year, or will it be only in 2015?

Mariano Bosch

Sorry. Again, Ravi, can you repeat that question? We couldn’t hear pretty clear.

Ravi Jain – HSBC Securities

No worries. The first question was what is your view on the increase in ethanol blends to 27.5%? And second question is, when do you expect to see a fuel price increase allowed by the government? Would it be closer to the end of 2014, or do you expect it to happen only a meaningful increase in 2015?

Mariano Bosch

Okay. Ravi, I am going to ask Marcelo Sanchez, Commercial Director about this with us to take your question. Marcelo, please.

Walter Marcelo Sanchez

Hi Ravi, good morning. It’s a very good question. What I would say that as of today, the only thing – the known thing about the increase in the blend is still at the commission stage at the Congress, and actually there was a positive news today that passed through the commission, but it’s still a long way and it is approved and pass on the steps to go as a law.

And the second part of your question regarding the increase in price of the gasoline. There have been really a long discussion on this, and at government level as well as you might be aware of. And we think we expect an increase in the price-wise at the end of this year, and that is exactly what we are today expecting than there won’t be – the inflation won’t be to – we’re not expecting a big increase in price, but there will be a movement in price by the end of the year. That’s our expectation.

Ravi Jain – HSBC Securities

Thank you. That makes sense. And the second question was, those of your strategy of land acquisitions. Are you looking at purchasing land in the shorter term in Brazil or in other parts of Latin America? I just wanted to know your strategy on that front.

Mariano Bosch

Okay, Ravi. As we have been always saying, we are looking for land in South America. We are searching and we are analyzing potential opportunities in Brazil, Argentina, Uruguay, Paraguay, Bolivia and Columbia. Those are the places where we are really looking seriously at different potential opportunities, but we haven’t achieved yet the returns we want in order to be able to buy the land, so that’s why you haven’t see us acquiring land. So the harder returns that we are asking for the land, we are not seeing them there on the different opportunities that we are analyzing.

So if the return appears, you may see us buying land, but if we don’t see the returns that we are willing to obtain, we won’t.

Ravi Jain – HSBC Securities

Thank you. That’s very helpful.


(Operator Instructions) Mr. Mariano, would you like to provide any closing remarks?

Mariano Bosch

Sure. We have started a new year, fully motivated to develop our plans. On the Farming, we are in the end of the harvest season and we have shown in our results. Our Land Transformation model is paying off. On the Sugar and Ethanol, we started a new campaign in our cluster in Mato Grosso do Sul in optimal operational conditions. And our employees, contractors and stakeholders are completely aligned to obtain their maximum efficiencies in our production.

2014 will be a year full of challenges, and we will continue with our discipline of creating value for the company and deliver effective returns to our shareholders. Thank you very much. See you in next meeting.


Thank you. This does conclude today’s presentation. You may now disconnect your lines and have a nice day.

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