Adecoagro Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 13, 2024

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro's 2nd Quarter 2024 Results Conference Call. Today with us, we have Mr. Mariano Bosch, CEO Mr. Emilio Nieko, CFO Mr.

Operator

Renato Junqueira Pereira, Sugar, Ethanol and Energy VP and Mrs. Victoria Cabello, Investor Relations Officer. We would like to inform you that this event is being recorded and all participants will be in a listen only mode during the company's presentation. After the company remarks are completed, there will be a question and answer section. At that time, further instructions will be provided.

Operator

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 factors 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.

Operator

Mr. Bosch, you may begin your conference.

Speaker 1

Good morning, and thank you for joining Adecoagro's 2024 Second Quarter Results Conference. Before going into the highlights of each business, I would like to make some comments on our shareholders' distribution. As of this date, we have exceed in $16,000,000 our minimum distribution policy. So far, we invested $51,400,000 to repurchase 5,200,000 shares, equal to 4.9% of the company's equity and also committed $35,000,000 in cash dividends, with the first installment being already paid. Furthermore, our Board of Directors approved the renewal of our buyback program, which enabled us to repurchase up to an additional 5% of the company's equity up to year end.

Speaker 1

Consequently, we expect to continue allocating cash in share repurchases during the second half of the year. This clearly shows our commitment towards sharing results with our shareholders. While we continue investing in growth projects with attractive IRRs and maintaining our debt levels. Now moving on the results. Consolidated adjusted EBITDA during the quarter reached $140,000,000 3 percent higher year over year, whereas year to date amounted to $230,000,000 that is 2% higher than last year.

Speaker 1

Starting with our Sugar, Ethanol and Energy business, the investments done in expansion planting are paying off. Given the wood grain availability, we have crushed more, produced more, while our unitary costs remained unchanged. Despite the lower than average rainfall received, having ample gain availability has become a competitive advantage for us. Although sugar continues to be the best product, ethanol prices are also recovering. Still so, the lower than expected yields and the year over year decrease in selling prices were the main drivers towards the decline in adjusted EBITDA generation for this business.

Speaker 1

In our farming business, adjusted EBITDA generation almost doubled during the 1st semester versus prior year. This was possible thanks to expand our rice footprint into Uruguay and its consolidation to our already vertical integrated operation. This, in turn, has placed us as a relevant player in the region, always with a focus on being the low cost producer. In crops, normal weather conditions after experiencing the worst drought in Argentina's history are the main explanations towards the better results, even though these are lower than expectations due to the decline in international prices. Lastly, in dairy, we continue to consolidate our position in both the domestic and export market with the development of our high value added products leading to better results each quarter.

Speaker 1

Before passing the word to Emilio, a brief update on ESG. In mid May, we published our 2023 Integrated Report in which we reinforced our commitment towards reducing our carbon intensity by 2,030. Moreover, an in-depth description of our sustainable production model is also available, together with our ESG strategy and practices. To conclude, I would like to express my gratitude to all our people across Adecoagro for their hard work. I am convinced that we have the right people and that we are following the right strategy to generate good returns and value for our existing shareholders.

Speaker 1

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

Speaker 2

Thank you, Mariano. Good morning, everyone. Let's start on Page 4 with a summary of our consolidated financial results. Gross sales totaled $398,000,000 during the Q2, while on an accumulated basis, it reached $651,000,000 Although volumes sold for most of our products represented a significant year over year increase, results were partially offset by lower prices for some of the commodities that we produce. That being said, adjusted EBITDA reached $140,000,000 during the quarter, whereas year to date, it stood at $230,000,000 Higher results during the quarter were driven by the sale of La Fequadia Farm, booked within our Crops segment, as well as to an outperformance of our Dairy segment.

Speaker 2

This in turn partially offset the lower results in our rice and sugar, ethanol and energy operations. Now please turn to Slide 5. Regarding our production figures, in the bottom right chart, we can see that crushing volumes in our Sugar, Ethanol and Energy business were up 21% versus the same period of last year. Higher crushing translates into higher volume and better dilution of fixed costs. In our Farming division, the increase in the production of grains was explained by a significant recovery in yields on normal weather conditions during the development of our crops as well as to higher planted area.

Speaker 2

Let's move to Slide 7 with the operational performance of Sugar, Ethanol and Energy Business. Crushing volumes amounted to 4,000,000 tonnes during the quarter and 6,100,000 tonnes on an accumulated basis. The increase in crushing was mainly driven by greater sugarcane availability, thanks to our expansion planting activities and higher effective milling days due to the dry weather experienced year to date. Regarding productivity, TRS per hectare remained in line versus the prior year despite presenting a slight decrease in yields. In terms of mix, we continued to maximize sugar production given its attractive premium over ethanol.

Speaker 2

Within our ethanol production, we were maximizing the production of hydrous ethanol, as demand for this type of ethanol has been significantly increasing and gaining market share, offering the better margin. If required, we can dehydrate our ethanol at any time. Let's please turn to Slide 8, where we describe sales conducted throughout the periods. Net sales amounted to $172,000,000 during the quarter, while year to date reached $275,000,000 As you can see on the top left chart, the decrease in the selling price of sugar was mostly due to lower global prices, driven by a stronger pace of milling in Brazil during the first half of the year. In the case of ethanol, selling prices continued below the previous year on greater supply.

Speaker 2

Having said this, volume sold throughout the quarter was timely done to profit from spikes in prices. Moreover, we continue holding to our ethanol inventories to profit from better prices in the future. This represents 84% of our year to date ethanol production. Moving on to energy, we focused on complying with our long term energy contracts. However, lower prices and a weaker Brazilian real drove the decline in sales.

Speaker 2

Regarding carbon credits, we have already sold over 240,000 sebaios at an average price of $17 per sebaios. Please go to Page 9, where we would like to present the financial performance of the Sugar, Ethanol and Energy business. Adjusted EBITDA amounted to $107,000,000 during the Q2 and $159,000,000 for the first half of the year, Despite presenting year over year gains in the mark to market of our commodity hedge position, results were offset by year over year losses in the mark to market of our biological assets on lower expected yields, coupled with a decline in net sales. Finally, to conclude with the Sugar, Ethanol and Energy business, please turn to Slide 10, where we would like to briefly talk about the current outlook. Assuming normal weather for the remaining 6 months of the year, we focused on increasing annual crushing volume versus 2023 given good harvest space and cane availability.

Speaker 2

From a commercial point of view, the evolution of sugar prices will mostly depend on Brazil's crushing volume for the rest of the year as well as on its industrial flexibility to reach the total annual production expected by the market. We have approximately 30% of our expected 2024 sugar production still enhanced, while the balance was committed at an average price close to $0.23 per pound. In the case of ethanol, demand remained strong given its attractive price versus gasoline, consequently absorbing new supply and supporting the recovery in prices. We expect to sell our inventories over the following quarters as we believe ethanol prices have room to continue increasing due to the current low parity at the pump as well as to the sugar max scenario in Brazil. Now we would like to move on to the Farming business.

Speaker 2

Please go to Slide 12. By the end of July, we harvested 98% of the total area and produced over 1,000,000 tonnes of agricultural produce. The remaining hectares are expected to be fully harvested during the rest of this month. As anticipated, most of our crops presented a significant year over year increase in productivity given the normal weather conditions experienced, as opposed to last year which was affected by La Nina weather event. In the case of late corn, our production in the northern region was negatively impacted by 0 plasma.

Speaker 2

Consequently, our average yield reached 5.2 tonnes per hectare, below our initial expectations. We are planning on reducing corn area during the 2024, 2025 season to lower our exposure and switch to other more suitable crops. Moving on to rice. During this harvest season, we obtained an average yield of 6.1 tonnes per hectare. Yields were negatively impacted by the excessive rainfalls received by the end of the planting window, which led to a portion of our hectares being planted outside the optimal period.

Speaker 2

Moreover, these precipitations continued throughout summertime, reducing yield potential. However, prices more than offset the reduction in production. In dairy, the increase in total raw milk production is explained by better cow productivity as we continue enhancing efficiencies in our free and export market, offering higher value added products as well as commodity sized products and being present across different price tiers with our consumer product brands. To conclude, we began planting activities for our next campaign, starting with wheat and other winter crops. The soil has recovered its moisture, enabling us to conduct our planting activities within the optimal window and to expand our planting area to the northern region, which was not included in prior seasons.

Speaker 2

On the following Page 13, we present the financial performance of our Farming business. Adjusted EBITDA for the Farming business totaled $38,000,000 during the quarter, whereas year to date amounted to $82,000,000 Higher results year to date are mainly explained by an outperformance in all three segments. Adjusted EBITDA for our Crops segment amounted to $15,000,000 reflecting the sale of La Pequaria Farm, which was completed in April 2024. On a year to date basis, adjusted EBITDA was $20,000,000 The year over year growth was mainly explained by this farm sale as well as to greater yields during the 2023-twenty 24 harvest campaign. Focusing solely on our crops results, although we saw a significant year over year recovery in production, results were also negatively impacted by lower international prices for our main products as well as to higher costs in U.

Speaker 2

S. Dollar terms. Moving on to the Rice segment. The year over year decline in adjusted EBITDA during the quarter was mainly explained by lower sales, coupled with higher costs in U. S.

Speaker 2

Dollar terms. However, on an accumulated basis, adjusted EBITDA grew by over 50%, mostly explained by year over year gains reported in the mark to market of our biological assets on higher prices. Lastly, adjusted EBITDA in our dairy segment totaled $11,000,000 during the period, whereas year to date reached $18,000,000 Results were positively impacted by higher sales on higher prices as we improved the mix of higher value added products and maximize the production of fuel milk for the domestic market. Let's now turn to Page 15, where we would like to present our capital allocation strategy. According to our distribution policy, we are committed to a minimum distribution of 40% of the cash generated during the previous year via a combination of cash dividends and share repurchase.

Speaker 2

As of today, we have already committed $86,000,000 $16,000,000 more than our minimum distribution policy. From this amount, dollars 35,000,000 in dividends were approved. The first installment, dollars 17,500,000 was paid in May, representing approximately $0.17 per share, whereas the 2nd installment shall be payable during November in an equal cash amount. In addition, we have already repurchased $51,000,000 in shares under our buyback program, which represents approximately 4.9% of the company's equity. Going forward, we expect to continue with our share repurchase.

Speaker 2

To do so, our Board of Directors approved the renewal of our buyback program to repurchase up to an additional 5% of the company's equity until year end. Please turn to Page 16 for a broader view of our debt position. Net debt amounted to $632,000,000 making a 26% decrease compared to the same period of last year. This was explained by the financial strategy carried out in Argentina during the previous year as well as to better results from operations, which translates into higher cash. As shown in our financial figures, the decline in net debt was done without disattending our distribution policy and growth projects.

Speaker 2

As of June 30, 2024, our liquidity ratio reached 2.9 times, showing the company's full capacity to repay short term debt with its cash balances, whereas our net leverage ratio was 1.3x, 0.6x lower compared to the same period of the previous year. Subsequent to the end of the quarter, we announced a cash tender offer for up to $100,000,000 of our senior notes due in 2027, out of which $83,600,000 were accepted by the early tender date. This is an example of our disciplined and constant search for liability management opportunities to better finance our operations at attractive rates, while continue adding value to shareholders. On the following slide, we describe our CapEx program. Expansion CapEx represented $17,000,000 during the quarter $45,000,000 on an accumulated basis.

Speaker 2

In Brazil, we continue increasing our sugarcane plantation and investing in our biogas unit in Ibiema Mill where our biomethane production takes place. In our Farm and Business, we invested on minor industrial improvements in our 2 day reprocessing facilities as well as in new harvesters for our rice operations. Thank you very much for your time. We are now open to questions.

Operator

Thank you. The floor is now open for Our first question comes from Bruno

Speaker 3

Thank you for taking my question. It's only one actually. You guys have been carrying this higher level of ethanol inventory as discussed here, and the strategy to benefit from higher price in the future is a clear thing, but I would like to hear more about the expected time to deploy these volumes into the market. So just wondering if you guys could please share your most updated thoughts on the ethanol price curve, perhaps from the perspective of parity to gasoline prices and the level that makes the company more comfortable to accelerate sales? Maybe the expected timing for Peri reaching this level.

Speaker 3

That's it from my side. Thank you.

Speaker 1

Hi, Bruno. Thank you for your question. I think Renato can address your question in detail. Renato?

Speaker 4

Hi, Bruno. Thank you for your question. We are positive regarding ethanol price. The hydros demand has been very strong, actually 50% higher than the same period of last year. Demand is reaching almost 2,000,000,000 liters of hydros per month and the part rates at the pump is still at 67%, which benefits the consumption of hydrous ethanol.

Speaker 4

Also, the off season is expected to be much longer than last year, so lower supply during this period. Sorry, if you take the hydros stock to use right now, it's 1 month lower than the same period of last year. So we think the only way to curb demand is through prices. So prices has to surpass the 7% party rate that we think is going to happen in the next months. It's difficult to predict exactly when, but in the next months that's going to be I think that is going to be the case.

Speaker 4

So you have an upside of around 10% of the current prices. Remember that the current price in dollar terms are 12% higher than the same period of last year and 25% higher than the beginning of the year.

Operator

You. Our next question comes from Isabela Simonato with Bank of America. You can open your microphone.

Speaker 5

Thank you. Good morning, everyone. So I have a question also on sugar and ethanol, but more focused on sugar because I think there are several moving parts at this point and the price has been quite volatile. So, I would like to hear more your thoughts on the sugar price outlook, at least for the remainder of the year. And in light of that and what Renato just said about ethanol, right, how should we think about the mix towards the end of the season between sugar and ethanol?

Speaker 5

And my second question is on rice, right? We're definitely seeing rice prices at high levels, seasonally weaker in the last quarter. But I was wondering also if we if you remain optimistic about rise for the remainder of the season and if there's any outlook for 2025 as well. Thank you.

Speaker 1

Okay. Thank you for your question, Isabela. I will let Renato answer your question, the follow-up question on prices of sugar and mix. So Renato, can you take that part of the question? And then I will take the rice prices question.

Speaker 4

Thank you for the question, Isabela. So we remain positive with sugar price for the short term. The low levels of world sugar stocks, very low, the level of stocks actually is one of the lowest in the last 10 years. Also the supply of sugar is very dependent on the Brazilian crop. And Brazil is facing a difficult year in terms of weather.

Speaker 4

So the weather is very dry and there were cold front that hit some parts of Brazil not helping the yield situation. Also, the mix is disappointing. Everyone was expecting a mix to reach 52% this year, and it seems that is not going to be possible. It should be more close to 50%. So we believe that we will have some opportunities to hedge our production, the remaining production of this year and next year at higher prices.

Speaker 4

And also, we have been focused on producing added value, VHP, bagged sugar, which is 10% there is a 10% premium over the conventional VHP, the price of the bagged VHP. Since we have the tax rebate program, we also we always have a floor to change the mix towards ethanol. The floor today is around $0.18 per pound. So if the price of sugar goes below this number, we will be changing the mix. We don't think that's going to be the case, but that's the floor.

Speaker 4

And today, we have our 7% of the current estimated production heads at price of $0.23.1 per pound.

Speaker 1

Okay. Thank you, Renato. Is it clear, Isabella, on the sugar and ethanol?

Speaker 5

Sure. Yes.

Speaker 1

Okay. If that's okay, I'll take the rice prices. Here, it is important to understand that when we consider our own rise prices, this is a component that includes high value added product, and we are producing different varieties, as we've been explaining since the beginning, where we developed a whole rice business, where we sell different varieties to different clients. So we are specializing our own production, and we are producing what every client needs. So we are always going to take a different in price, respect of the average price or the commodity price or the U.

Speaker 1

S. Price that sometimes we follow as a general price. So that is important to understand the increase when we compare the price of last year with the price of this year in a per ton basis. So making that clarification, the general view is that the whole region in South America will continue to have reasonable prices for all this year. And then for the following campaign, it will depend on the crop harvest in South America.

Speaker 1

Crop harvest in South America last year and the previous year was relatively low. And this year, it will depend on the planting that we are starting in a few days. So whatever happens in next year campaign will affect next year prices. So it's too early to talk about future prices in the longer term. But in the short term, we are very confident on today's level of prices.

Speaker 5

That's clear. Thank

Operator

Please hold while we poll for questions. Sorry, we have another question from Thiago Duarte. You can open your microphone.

Speaker 6

Yes. Thank you very much. Hello, everybody. Yes, quick one on our side here. Just if Renato could talk a little bit about cash production costs for the year.

Speaker 6

Crushing is at the very strong pace as you guys show. There is expectations of growth in the crushing volume throughout the year. And we had previously expectations that production costs could come down as a result of combination of currency, lower input costs and obviously the operational leverage that your business should be capable of generating. So just if we should expect something different in terms of year over year production costs in the second half of the year relative to what we saw in the first half of the year in the sugarcane business? That will be all.

Speaker 6

Thank you.

Speaker 1

Thank you, Thiago. Renato?

Speaker 4

Thank you for your question, Thiago. Regarding the production costs, there are some components that are decreasing such as fertilizers, freight and leasing rates and some components that are increasing, such as salaries according to the inflation, 3rd party services in diesel, 3rd party services just because of the diesel. And the yields should be slightly lower than the one that we obtained last year because of the the especially because of the dry weather And the milling to be slightly higher because we have, as Mariano mentioned, planting and focusing a lot in our expanding our plantation and also because we acquired some opportunistic 3rd party sugarcane. If you take all those factors into the equation, we think that our costs in AIs should be very similar to the one that we had last

Speaker 1

I think we lost Renato, but just to finish, the cost in real is similar to the previous year. So including the devaluation of the real, the cost in dollars that is how we measure and how we express slightly lower than what it was last year.

Operator

Our next question comes from Giulia Rizzo with Morgan Stanley. You can open your microphone.

Speaker 7

Hello, good morning, everyone. Thank you for taking my question. I would like to touch on the outlook for sugar production in Brazil and sugar prices. A lot have been said about the dry weather and how that will affect the market. Can you explain what needs to happen?

Speaker 7

Because so far, sugar production and crushing across the board in Brazil has been really strong. How much yields or TRS has to decline in order to affect the expectation of sugar production in Brazil and, therefore, have an effect on global prices?

Speaker 1

Thank you, Giulia, for your question. Renato, are you back?

Speaker 4

Yes. Can you hear me?

Speaker 1

Yes, perfectly well.

Speaker 4

Hi, Giulia. We think that there are 2 main points that are going to affect sugar production. 1st is the yield. I think the yield is going to start to decline from now in the center south of Brazil. Actually, the number that was just published from July was about 10% lower than the same period of last year and the weather remains very dry and there are some cold fronts that hit part of the sugarcane areas of Brazil causing some damage, something not very intense but it's not helping the situation, which is already pressured because of the dry weather.

Speaker 4

The 1st part of the year, the yields were higher because there are a lot of cannabis that was crushed in 18 months sugarcane. That's not the case anymore. So now we are going to see a lot of reduction in yields from now on. And also the production mix, I think the mix is disappointing. Everyone is trying to maximize sugar.

Speaker 4

I think the initial expectation was that Brazil would reach 52% of sugar mix. Up to now, the mix is 49%. So probably the mix is going to finish the year close to 50%, 2% lower than initially thought, and it will lose in the mix around 2,000,000 tons of sugar.

Speaker 7

And Renato, on the dry weather, can you give me a color on where is this and when is it close to a region? Should we expect also Adecoagro to face perhaps on the 0 or in 2025 a decline in crushing and yields as well?

Speaker 4

Yes. We start the year with a very good outlook of sugarcane, mainly because of the rains that we received in the last quarter of last year, but then the weather changed and the weather became very, very dry. Actually from January through the end of July, we received 38% lower rains than the historical average. That's why our yields are under pressure right now. We expect this year, we're going to finish the year with a yield slightly lower than last year, but we are going to crush more sugarcane because of the plantation and because of the 3rd part sugarcane that we have been acquiring.

Speaker 4

For next year, I think it's too early to say anything. We still think that we are going to crush a little bit more than we are going to crush this year.

Speaker 7

Okay, thank you very much. Congratulations.

Speaker 4

Thank you.

Operator

This concludes today's question and answer session. At this time, I would like to turn the floor back to Mr. Mariano Bosch for any closing remarks.

Speaker 1

Thank you for everyone to participate and hope to continue seeing you in our upcoming events.

Operator

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

Powered by Quartr

Key Takeaways

  • Shareholder distributions: Completed $51.4 million in share repurchases (4.9% of equity) and committed $35 million in dividends, with a renewed buyback program to acquire an additional 5% of shares by year-end.
  • EBITDA performance: Q2 consolidated adjusted EBITDA reached $140 million (up 3% YoY) and YTD $230 million (up 2% YoY), aided by strong Dairy results and a one-off farm sale offsetting softer sugar and rice margins.
  • Sugar, Ethanol & Energy: Crushing volumes rose 21% on expanded planting and dry weather, sugar production prioritized for its premium, and 84% of ethanol output held in inventory anticipating further price recovery amid tight global stocks.
  • Farming business gains: Farming EBITDA nearly doubled YTD thanks to Uruguay rice expansion and yield recovery after historic drought, though international price declines and higher USD costs tempered overall results.
  • Balance sheet strength: Net debt fell 26% YoY to $632 million, net leverage at 1.3x and liquidity ratio at 2.9x, plus $83.6 million of 2027 notes tendered, supporting both growth CapEx and shareholder returns.
AI Generated. May Contain Errors.
Earnings Conference Call
Adecoagro Q2 2024
00:00 / 00:00