Adecoagro S.A. (AGRO) Q4 2015 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and thank you for waiting. At this time we would like to welcome everyone to Adecoagro's Fourth Quarter 2015 Results Conference Call. Today, with us we have Mr. Mariano Bosch, CEO; Mr. Charlie Boero Hughes, CFO; and Mr. Hernan Walker, Investor Relations Manager. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the Company's presentation. After the Company's remarks are completed, there will be a question-and-answer section. 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.

Good morning everyone and thank you for joining our call where we present the Company’s earnings for the year 2015, as you will see during the presentation we have achieved very good results despite the fact that we're transitioning a low price cycle of commodities we produce. These results obtained in the difficult environment in this difficult environment is a direct consequence of the focus we have put in having a low cost of production, combined with a very lucrative strategy. Since our inception we have only conceived our company as becoming the lowest lower cost producer of each commodity. In addition 2015 marked a milestone in the relatively short history of our company. First we completed the construction of state of the art sugar ethanol and energy cluster in Mato Grosso Do Sul. This cluster has already started crushing in 2016 for the first time at full capacity. And second, we became free cash positive as a result of not only the outstanding performance of the sugar ethanol and energy asset, but also the contribution of risk of our business trends. And our profound discipline towards obtaining efficiency at all levels of our company. This has definitely put the Company in an excellent position to take advantage of potential opportunity. In a different token [ph] Argentina’s new government has made significant changes to agriculture policy that have positively impacted our margin and profitability. Mainly the elimination of export taxes and export quotas for all agricultural commodities except for soybean which was reduced by 5% and more than 50% depreciation of the Argentine peso. Under this new macro-economical and political scenario the outlook for our businesses having improved substantially and most certainly will bring opportunities to continue growing and improving our results. We have begun the New Year of full challenges and are excited about the prospects of the Company for the coming month. Our teams are fully motivated to execute the Company's strategy in the most efficient and sustainable manner generating value to our shareholders. Now, I would like to ask Charlie to walk you through the main operating and financial highlights of the quarter. Charlie, please go ahead.

Thank you, Mariano. Good morning, everyone. I would like to start on page 4 with the brief analysis on the rain in Mato Grosso do Sul. As you can see on the chart, Adecoagro [ph] transformed 2015 the most raining year in the last decade. On the full year basis, rains reached 2,249 millimeters in Mato Grosso do Sul, 40% higher than the 10-year average. On a quarterly basis, the fourth quarter was the most effected by excess of rains, in fact it rained 46% more than the same year average and 62% more compare to the 10th year of last year. I would like remind everyone that sugarcane cannot be harvested when the soil is wet because the heavy combined and trucks will damaged the sugarcane roots and the soil. Let's move to Page 5 to see the impact on our trashing activities. The excess rains during the quarter resulted in significantly delay and disruptions in sugarcane harvesting and crushing. Sugarcane milling during the fourth quarter of 2016 reached 1.8 million pounds, 22% lower year-over-year and lower than our expectations. It is important to highlight that the sugarcane which was not harvested during the fourth quarter, it's schedule to be harvested during the first quarter of 2016. In fact, as of today we have harvested over 1.2 million ton of sugarcane during 2016. On a yearly basis however, sugarcane milling in 2015, increased by 15% driven by higher sugarcane availability together with the higher milling efficiencies in all of our mills. Let's now move to Page 6, where I would like to highlight our agricultural productivity. As you can see on the top charts, our sugarcane yields in the fourth quarter reached 95 tons per hectare, 11% higher than last year. TRS was negatively affected by the abundant range during the quarter and felt 5% to 127 TRS per ton of sugarcane. As we stated this factors TRS per hectare increased 6% in the fourth quarter of 2015, compared to the fourth quarter of 2014. As you can see on the bottom charts year-to-date productivity improvements are even more remarkable. TRS per hectare has increased 16% year-over-year. As explained in previous quarters, these productivity gains are a result of our focus on improving our agricultural operations. Some examples of efficiency enhancements include effective implantation of pest controls, selection of specific cane varieties from the region, extension of the sugarcane growth cycle and implementation of GPS controlled planters [ph] and combines among others. Turning to Slide 7, now I would like to focus on Sugar and ethanol production. As shown on the top charts both sugar and ethanol production decrease during the quarter driven by the fall in sugarcane milling. As you may see in the bottom charts, sugar production reached 465,000 tons in 2015 marking a 12% increase over 2014. Regarding ethanol, production stood at 361,000 cubic meters, 20% higher year-over-year. Measured in TRS equivalent, production increased 17% in 2015 compared to 2014. On a quarterly basis production measured in TRS equivalent has decreased 25% mainly explained by low sugarcane milling. Please turn to Slide 8, where I would like to comment on cogeneration. In the top chart, you may see that exported energy or in other words, the energy which is sold to the grid, increased by 25% on a year-to-date basis. The growth in cogeneration is explained by the increase in sugarcane milling, but most importantly by higher cogeneration efficiencies. As you may see in the bottom chart, cogeneration exports reached a record of 66 KWh/ton of sugarcane crushed in 2015, 8% higher than the previous year. It’s worth noting that this represents one of the highest cogeneration ratios in the industry and we believe there is still upside for improvement. Now let’s turn to Slide 9, where I would like to discuss our sugar sales. If you take a look at the graph on the left, you may see that our sugar sales volumes during 2015 total 598,000 tons, marking a 27% increase compared to 2014. As we already explained this increase is directly coordinated to the increases TRS equivalent production due to the increase in sugarcane milling. As you may see in the chart in the middle, the increase in volumes was partially offset by lower sugar prices. As a result of the global sugar surplus and the weak sugar cycle, our realized sugar prices measured in dollar term during 2015 were in average 20% lower than prices in 2014. This resulted in 2% increase in total sales. If you could please turn to Slide 10, I would like to walk you through our strategic Ethanol Carry. Due to production seasonality and the fact that mills are maximizing ethanol production and sending us the produce in order to generate cash, hydrous and anhydrous ethanol prices traded at weak levers between May and August. Prices reached the lowest levels in August. During this month, we decided to minimize our sales volumes and start to fill up our ethanol tanks at our cluster in Mato Grosso do Sul. The yellow bar in the chart shows the growth in our ethanol stock pile. As you may see in the chart, ethanol prices began a very steep rising during October, driven by strong consumption growth coupled with a 6% increase in gasoline prices announced by Petrobras on September 30. At a matter of fact, both hydrous and anhydrous ethanol prices increased by 55% and by 49% respectively in real term. 32% and 28% in dollar term for the lowest values were registered in August. Let’s move to Page 11. As you may see in this left chart ethanol sales volume increased by 111,000 cubic meter all 38% driven by the growth in production, nonetheless as you may see in the chart in the middle ethanol sales have increased by merely 7% in this frame by a 22% decrease in realized ethanol prices during 2015 compared to 2014 as a result of devaluation of the Brazilian real. Now let's please turn to Slide 12, where we like to discuss energy sales. As you may see in the top left chart energy spot prices throughout the year has fallen considerably compared to last year. In fact as it can be seen in the table average prices fell by 58% in real terms, however given the 47% depreciation of the Brazilian real average prices measured in both terms fell by 71%. This sharp decrease is mainly explained by the falling domestic demand due to the economic recession. As you may see in the charts below, this has negatively affected our energy sales. Despite a 37% growth in volume sold, net sales fell by 30% however it was worth nothing that cogent cash margins remain over 80% therefore this is continued to be an important contributor to both in EBITDA and cash generation within the sugar, ethanol and energy segment. Let's move to Slide 13, financial performance during the fourth quarter was negatively affected by the lower crushing volumes. This is reflected in lower sales, adjusted EBITDA and margins. On a full year basis with firm operation and performance achieved during the year such as 15% increase in crushing volume and 16% increase in agricultural productivity and 25% increase in cogeneration ratio, et cetera, was largely offset by lower sugar, ethanol and energy prices in dollar terms. As a result the sales remain virtually flat during the year reaching 375 million and adjusted EBITDA grew marginally from 164 million in 2014 to 165 million in 2015. Nonetheless, we were able expand our adjusted EBITDA margin to 42% benefiting from further operational leverage which has resulted in the dilution of our fixed cost. Let's turn to Slide 14 to get an overview of our sugar hedge position. As part of our risk and commercial strategy, we mitigate price volatility by hedging our crops in the derivative markets. Despite the weak commodity price environment, our commercial team has been able to hedge prices above current market prices, protecting the company’s cash flows and margins. We have substantial part of our production still open to benefit from the recent sugar price rising. Also at 2015 yearend at 63% of our total 2016 and ’17 sugar production hedged at $0.0137 per pound. I will now like to move onto the farming business, please direct your attention to Slide 16 where we discuss our farming production. Planting activities related to the 2015 and ’16 harvest continued during the fourth quarter and early 2016. As of the date of this report, we have completed our planting activity at total of 210,755 hectors have been successfully seeded, 8% lower than the previous harvest. The reduction of planted areas is explained by the sale of La Carolina farm. Lower seeding area and lower level of cropping as a result of crop rotation and margin optimization in terms of crop rotation we have reduced the soybean area and increased corn area by 20% as a result of higher expected margin resulting from the elimination of export product and taxes. Planting conditions for 2015 and ‘16 harvest years have been adequate. On average planting was done in a timely manner with very good humidity conditions through the initial growth of pace of the crop. During December we also completed the harvest of the wheat crop. Yields per hector reached 2.5 tons per hector, 11% higher than the previous crop. Let's move to Page 17, where I would like to walk you through the financial performance of our farming and land transformation businesses. As you can see in the chart in the left, adjusted EBIT in the fourth quarter of 2016 reached 33.3 million, 49 million higher compare to fourth quarter of 2014, this increase is primary by, first a 10.7 million increase in changes in fair value in our crops segment, resulting primarily from higher wheat and corn gross margins driven by an 11.2% increase in wheat yields and higher net prices for both crops as a result of the elimination of export taxes and elimination of export quotas in Argentina. Secondly, a 24 million gain generated from the sale of farms in Argentina, which I’ll describe in detail in the next slide. And third, a 1.6 million gain from the mark-to-market of our commanding expectation, which was 13.1 million higher than the fourth quarter of 2014. On a full year basis adjusted EDIT was 63 million implying a 19% decrease compared to 2014. This fall is mainly explained by lower commodity prices coupled with the appreciation of Argentinean peso in the real term during more to 2015, which has increased our cost of production in dollar terms. These effects were partially offset by higher productivity and profit of hedge results. Let's move to Slide 18, where I would like to walk you through our Land Transformation business. During November and December of 2015, we sold La Canada farm and sold our 49% interest in El Orden and La Carolina farms, these farms are located in province of San Luis and Santa Fe respectively. In aggregate, we generated cash proceeds for 59 million and capital gains or adjusted EBITDA for 24 million. I would like to highlight that both farms were sold at a premium to Cushman & Wakefield's independent farmland appraisal of 57% and 48% respectively. As may see in this chart in the bottom of this page, we have been consistently selling a portion of our fully developed land portfolio each year since 2006 and generating attractive return for our shareholders. In aggregate, we have generated cash proceed for 328 million and capital gain for 209 million. Let's move to Slide 19, the alternative [ph] team regenerated a $15.1 million gain related to the mark-to-market of our soybean, corn and wheat hedge position. It’s worth noting that half of these gains are already realized and captured in our P&L. As we can see in the top chart, as of December 31, 172,000 tons of soybeans related to the 2015 and ’16 harvest were hedged at $1,004 cents per bushel. The July futures contract as of December 31 was trading at $877 cents per bushel, generating a mark-to-market gain. In the case of corn, we hedged 98,000 tons of corn at $453 cents per bushel. As of December 31, the July futures contract of corn was priced at $370 cents per bushel, therefore we generated a mark-to-market gain. Let’s now turn to Page 21, which shows the evolution of Adecoagro's consolidated operational and financial performance. On a consolidated basis net sales decreased year-over-year from 694 million in 2014 to 649 million in 2015. Adjusted EBITDA decreased from 216 million in 2014 to 203 million in 2015. The gap in revenues and EBITDA is explained by lower prices in dollar term for most of the commodities we produce, higher production costs in our farming business due the appreciation of the Argentinean peso in real terms and a decrease in sugarcane milling during the last quarter due to excess rainfalls. Let's move to Slide 22, as you may see in the top chart prices for most of the commodities we produced have fallen between 16% to 25% in 2015, compared to 2014. Despite the weaker commodity environment, I would like to highlight that we have been able to keep our EBITDA margins stable, which is a direct result of our strategy of being the low cost producers for each of the commodities we produce and I will focus on operational efficiency. In addition, our geographic and product diversification allow us to mitigate yields and price volatility, providing stable cash flows and margins. Furthermore as you may see in the chart below in spite of very high commodity prices volatility over the last five years, this factors have allow Adecoagro to maintain relatively stable margin ranging between 25% and 31%. This strategy will allow Adecoagro to generate positive cash flow and stable margin throughout commodity cycle. Let’s move to Page 23. In term of the cash flow generation, the fourth quarter of 2015 marked a milestone for our company. Following an aggressive growth cycle that commenced in 2008 and will competed in mid-2015, we generated a record of 85.2 million of free cash flow before changes in net borrowing during the quarter. We expect the cash flow to become positive in 2016 on our full year basis and to continue growing over the upcoming years, [indiscernible] of full crushing capacity in sugar mill, the recent policy changes in Argentina as described above, the rebound in sugar and ethanol prices, enhancement of operational efficiencies and the devaluation of the Argentinean peso and the Brazilian real amongst others. Finally please turn your attention to Page 24, as you may see on the top left chart, our gross indebtness as of December 31, 2015 stands at $723 million, while net debt stands at $522 million. I would like to highlight that our net debt has decreased by $60 million compared to the third quarter of 2015 primarily as a result of the profit to cash flow generated during the fourth quarter of 2016 which was used to start the deleveraging profit. I like to mention that 67% of our debt remains in the long term including multilateral banks such as the BNDES and IDB at very competitive rates as you can see on the bottom left chart. Thank you very much for your time. We are now open to questions.

Thank you. The floor is open for questions [Operator Instructions]. And our first question will come from José Rizardo of BTG. José Rizardo: I have two questions and both are related to your sugar and ethanol business, so due to the rainfall during the first quarter postponed relevant part of sugarcane crushing, so my first question would be, could you give us update about how sugarcane crushing stands as of the first month of 2016 and also these first months of the year and usually the inter-crop maintaining periods. So I would like to know even the fact that your quotient [ph] began in January likely February, does that have any side effect left for the next crop and for the maintenance period? Thank you.

Thank you, Jose for your question. I would ask Renato Junqueira Santos Pereira our Head of Sugar and Ethanol Business to answer your question and then I can complement. Renato?

Thank you for question. Due to the weather pattern in our region we have a drier period in the transactional session and a wetter weather in the transitional session. Therefore we have a good condition to crush sugarcane during the first quarter and plenty of time to do our industrial maintaining throughout this year. As a consequence of conditions to rainfall pattern the TRS difference from the very beginning and very end of this year to the peak to the season is much more allowing us to crush a better sugarcane in the first quarter. As already mentioned as of today, we have already crushed 1.2 million tons of sugarcane. Our use is going to 110 tons per hector and the TRS content is around 107 kilogram per ton.

Next question will come from Rodrigo Mugaburu of Morgan Stanley.

I have two questions, one, if you how any -- you can tell us something about what you're going to do with the cash of the fund phase in the Argentina and then the other question is looking at the 10-year last year we're up 15% year-over-year, that's 100% of the ag due to ag practices or again in linear that also helped to increase the [Indiscernible], so bottom line my question is, can we use, assuming normal weather for next year or same kind of years for the sugarcane for the coming season? Thanks.

Hi, Rodrigo, thank you for your question. And I will answer first, the second -- you second question that is regarding the cane yields, I think that the cane yields have improved because of the two reasons because of all the operational improvements and also because of the range that are giving us a better gain. So I would say that it's a complementary and both things are making this result so I wouldn’t assume forever this exact yield that your taking-- that we're having right now. Then on the first part of your question regarding what it is that we're going to do with the cash generated by the fund saved in Argentina. Now we have a very important change in Argentina and now cash is functional [ph], so we can use the cash from one country to other and that is a huge change that happened for us. So overall the cash we think the same way and as we always answer this question on how it is or what is that we are going to be doing with the cash, the answer is we're looking for growth projects, but we're very disciplined on the return on investment that we need for each of this project. So in each one of our business lines in our sugar and ethanol in the farming business, we are looking for growth in the project and whenever the return on investment is achieved we will execute. So that is one of the things that we are looking to do with the cash. And then we can also reduce our debt level and we can also distribute capital to shareholders, so that three things can be done with cash that we will be generating.

And if I may, another question on the daily business you posted very strong operational results on the business, the economic situation in Argentina is kind of cannot -- been not allowed to have like strong economic results. Do you think -- what's your view on the recent affords from the Argentine government to improve the profitability of this sector, are you optimistic, that anything that is being done or discuss is going to help the economics of the business, are you optimistic that could happen this year or it's going to take a little more time in your view?

The international situation of the daily business is a very difficult situation. As we also mentioned we are really low cost producers in each one of these, say commodities. And so even though we are having such difficulties in daily business in general, we are still making money. But it is clear that we are going through the most difficult situation in terms of daily business stuff in general. And particularly, in Argentina we are optimistic that they are taking care and they will find a way on how to solve the particular difficult situation in Argentina. We are still making money, we are still in a reasonable situations compared to most of the industries that is really suffering, so that’s why we are optimistic that this measures will help to develop the industry.

Great thank you so much.

[Operator Instructions] Our next question will come from Fernando Suarez of Raymond James.

I was wondering if you can give us some color regarding the low land that prevents you from buying additional land in Argentina.

Okay, thank you Fernando for your question. Sure, this current administration in Argentina is focus on promoting investment in Argentina and that is clear. As part this idea, they are revising this referring ownership legislation. So as an example I can mention that we were in an investor meeting with a Secretary of Agriculture and he pointed out specifically that they are revising this, that this is a priority for them and that they are working with a governance of the different provinces in order to modify or adjusted this land ownership law.

Okay, and do you think that current prices will meet your higher return?

Depending on -- we believe that the prices of the land are a consequence of the cash yields of that land. That’s why particularly in Argentina, we think that the cash yields have improved and are improving with this new scenario, so we believe that the prices of land should continue to increase at its general idea. So that is the general concept. Then specifically of the different project that we are analyzing, there is always a huge gap between the asked priced and there are certain prices at which we can achieve the returns that we are looking for. So it will depend on the specific opportunity of each one of the thing that we are analyzing today in the different places of that region.

Okay great thanks.

[Operator Instructions] And we have a question from Victor Saragiotto of Credit Suisse.

Just want to understand how the company sees a consolidation into sugar and ethanol sector? You mentioned that you have received many offers, just want to know if you see this move or emulation still doesn’t make sense. Thank you.

Thank you Victor for your question. We see the sector of course going through many difficulties but again, we think that the important thing here is to be within the low cost producers of sugar, ethanol and energy and in the combination of the three. So we see attractive assets, when these assets are capable of being the low cost producers of three commodity. So there is a combination of soil and climate and availability of cane in order to be able to comply with this essence of characterization [ph]. Then us in particular we feel we are in a very good situation that we are obtaining our results that we outlined in the past and that our cluster is really within the concept of being the low cost producer. Are there opportunities, yes, there are many available not all of them we think are opportunities, but there may be some specific cases where we can comply with our targeted returns and where we can continue to be the local producers. So if these two characteristics happened we may be able to grow and I think our team is very committed and it's very well positioned to continue on.

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

So before ending the call, I would like to thank you all for joining and waited our commission to obtain the maximum return for our shareholders in a responsible and sustainable manner .We are aware of the difficult scenario the world is going through, nevertheless in the region and in particular Argentina, is showing clear signs of recovery in our sector and we are confident that we shall take advantage of such favorable environmental and continued generating value. So I look forward to seeing you in our upcoming IR event, thank you again.

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