Adecoagro S.A. (AGRO) Q4 2016 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 2016 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 session. 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 and thank you for joining us today. We are very pleased to present 2016 financial and operational results. Adecoagro delivered very strong results posting a very important year for the company. The year 2016 was transformative for Adecoagro as we accomplished the role set in our strategy. Generating strong financial operational performance and positioned our business for future growth. Furthermore, we exceeded our revenue and margin targets. Deliver positive free cash flow for the first time after nearly a decade of heavy investments [indiscernible] reducing our debt. In our sugar, ethanol and energy business, we are very proud to inform that we passed full capacity reaching the 10 million tons of sugarcane that we originally planned when we started the project back in 2006. This is a consequence of the commitment and undertaking of the company during the last 10 years. This important milestone could not be reached without the alignment and motivation of our agricultural and industrial teams. Crossing the full capacity, as I have highlighted is particularly important in this industry, in order to dilute fixed costs and enhance margins and returns. In this line our unitary cost for production continues to increase. Moving to our farming and land transformation business, we are presenting again a steady performance. In our rice operations, we were able to reduce operating costs as a result of higher agriculture and operational efficiencies, resulting in higher margins. Moreover, we are expanding our export markets as a result of the [indiscernible] pursued by the new administration in our network to promote the sector and enhance competitiveness. Regarding revenue spent, customer [ph] duty continues to increase reaching 37 liters per cow per day on yearly basis. Besides being a very difficult year for the dairy sector in Argentina, we were able to deliver good financial results which put us in an excellent position from now considering the new price scenario. All-in-all, on a consolidated basis, we deliver strong financial results. We have strength our balance sheet positioning our whole business for future growth. We are currently analyzing many acquisitive growth opportunities that would allow us to continue generating value and effective returns for all of our shareholders. Specifically, I would like to briefly mention the one that we are currently undertaking on the sugar, ethanol and energy segment. We are commenting an expansion of 3 million tons of crushing for the next five years. We believe that this growth based will enable us to maintain and even enhance our efficiency, guarantying low cost of production well at the same time increasing our returns. Now I will let Charlie walk you through the numbers of the quarter.

Thank you, Mariano. Good morning, everyone. Let’s start on Page 4, as shown on the chart to the left, effective milling days increased by 51% in the fourth quarter, at the same time our milling volumes to date increased by 16% as a result of the ramp up of the Ivinhema mill and higher operational efficiencies across harvesting, logistics and milling operations. As a result of these two factors we were able to crush a total of 3.1 million tons in the fourth quarter of 2016, 74% above last year. On a full year basis due to the early commencement of the harvest as part of the continuous harvest model that we implemented since the beginning of the year, coupled with the ramp up of the Ivinhema mill, sugarcane crushing has increased by 33% year-over-year. Let's move to Page 5 where I would like to highlight our agricultural productivity. As you can see in the sub charts our sugarcane yields in the fourth quarter reached 91 tons per hectors, 4% below last year, at the same time the TRS per ton of cane increased 6%. As a result of these two factors TRS per hectare increased 2% in the fourth quarter of 2016 compared to the fourth quarter of 2015. As you can see on the bottom chart full year 2016 productivity improvements are in the same line. TRS per hectare has totally increased 2% year-over-year. As explained in previous quarters this productivity gains are the result of our produce on improving our agricultural operation. An examples of efficiency enhancement include the effective implementation of pest control, selection of specific key varieties for the region, extension of the sugarcane growth cycle and implementation of GPS controlled sensors and combines among others. Turning to Slide 6, I would now like to focus on sugar and ethanol production. As shown on the top chart both sugar and ethanol production increased significantly, a 161% and 43% respectively. This is because of the back draft [ph] as previously discussed, effectively milling days surged to 67 days. 61% higher year-over-year. Besides production mix in the quarter was slanted towards sugar production and sugar prices were on average 23% higher relative to ethanol prices, measured in TRS equivalent production increased 87% in the fourth quarter of 2016 compared to the fourth quarter 2015. On full year basis production measured in TRS equivalent have increased 33% mainly explained by the 33% increase in sugarcane milling. Let's move ahead to Slide 7, as you may see in the table, production costs per ton of sugarcane crushed, measured in dollars decreased by 13% in the fourth quarter. This has been the result of an ongoing process of efficiency enhancement and fine tuning across the entire production process seeking to become the low cost producer of sugar and ethanol in the business, on a full year basis unit production costs have also decreased by 5%. Let’s turn to Slide 8, where I would like to discuss sales. Sugar prices continued climbing higher in the quarter trading 42% higher than a year ago driven by a global sugar defecate expected for 2017. As explained earlier, we maximize sugar production during the quarter to capture these attractive prices. Sugar sales volumes 341,000 ton, 39% higher year-over-year. Average realized prices increased by 61%, expecting [ph] net fixed growth of 110% year-over-year. In the case of ethanol, despite trading as discounted to sugar, hydrous and anhydrous prices were 33%and 29% higher than last year respectively. Affected primarily by higher oil prices and high sugar mix. Our ethanol sales volume was essentially flat year-over-year as a result of lower production mix. However, sales were positively affected by higher ethanol prices and appreciation of the Real in the quarter resulting in a 38% increase in realized prices and net sales. Turn now to Slide 9 to discuss energy production and sales. As you can see from the top left chart, we achieved an outstanding 27% increase in our cogeneration efficiency ratio reaching 83 kilowatt hour per ton of sugarcane crushed. As a result, reported energy increased a 121% reaching to 250,000 megawatt hour after transitioning [ph] in the top left chart. It's worth noting that as we entered into third party sales agreement, total sales volume for the quarter resulted in 480,000 megawatt hour. Finally, in terms of sales, despite a 64% decrease in average selling price measured in dollars, total net sales reached $21.3 million marking 195% year-over-year. This is mainly explained by the increase in production, coupled with the increase in third party sales. Finally, to conclude with the sugar, ethanol and energy business, I would like to focus on Slide 10. Here we can see the overall financial performance of the sugar, ethanol and energy business. As we just explained, as far we chartered increase in sugar and ethanol prices and the 39% increase in sugar selling volumes, net sales marked an 81% quarter-over-quarter. Adjusted EBITDA in the fourth quarter 2016 reached a $112 million, 123% higher than the fourth quarter of 2015. The main factors contributing to enhance financial performance during the quarter were a 74% increase in sugarcane milling coupled with higher sugar and ethanol prices. Higher agricultural productivity and efficiency gains in our industrial and cane logistics operations and $16.2 million gain from the mark-to-market effect of our sugar hedged position. These effects were partially offset by our $24.8 million non-cash loss from differed value of our unharvested sugarcane plantation, or in other words the sugarcane we will harvesting over the next 12 months. This reduction is driven lower estimated prices and here compared to the previous quarter. On a cumulative basis, adjusted EBITDA for 2016 grew by 59% reaching $255 million. Adjusted EBITDA margin excluding third party sales reached 55%. This result are primarily explained by our 33% increase in crushing volumes coupled with 19% increase in TRS sold as a result of the early start of the harvest due to the implementation of the continuous harvest volume, higher sugar and ethanol realized prices and lower production costs, as a result of operational enhancements and devaluation of the Brazilian Real. Results were partially offset by $6.7 million loss generated by the mark-to-market of our sugar hedge position and a 7.9 million non-cash loss from the fair value of our sugarcane planting. Let's now move Page 12, where I would like to focus on the current status of the 2016 and '17 harvest year of planting plan. As of today, planting activity has been completed and we have successfully planted 225,000 hectors. 7% higher compared to the previous harvest year. The current conditions of our crops are very good and soil humidity levels are excellent. The end of the planting season was slightly delayed due to heavy rainfalls during January and early February. Excess rains caused flooding and damages in specific regions of Argentina, especially in the north-west of Buenos Aires province and north-west provinces. However, our farms were only marginally affected. As a result of excess humidity, we reduced our planting plan by approximately 5,000 hectares or 2% of expected planting area. Despite these minimal area losses, most of the planted crops have developed above expectations and rains have guaranteed a very good supply of water in the soil, which will be vital for crop flowering and development in the coming months. Let's move to Page 13, where I would like to walk you through the financial performance of our farm investment. As you may see on the bottom chart on a yearly basis adjusted EBIT for the farming business were $48.7 million, 24% higher year-over-year. This increase is mainly explained by higher margins in our crops and rice businesses, reason by the elimination of the export taxes and export controls and enhanced by the devaluation of the Argentine peso. Regarding our business, adjusted EBIT reach $8.9 million compared to 3.3 million in the fourth quarter of 2015. This was mainly explained by higher sales volume and improved operational performance in our life for setting operation. The year-over-year devaluation of the Argentinean Peso which has reduced our production cost and our 7.7 million increase in the rice margin captured by the changes in fair value of the biological assets. This reflects and agricultural enhancements that we have implemented over the last year. Regarding the crop business, operating margin were 20% stronger, result of the elimination of the export taxes and export controls and devaluation of the Argentine Peso. Nonetheless reported adjusted EBIT was 15% lower year-over-year. This is explained by our $9 million loss resulting from the mark-to-market of our commodity hedged position driven by the rebound in international soybean and corn prices compared to our $16 million gain in 2016. Adjusted EBIT for all other segments during 2016 was $8.9 million of which $8.1 million corresponds to the settlement of an arbitration dispute with a third-party regarding the early termination of lease agreements related to our cattle land. Under the terms of the agreement, Adecoagro collected $9 million in 2016. Let’s now turn to Page 15, which shows the evaluation of Adecoagro’s consolidated operational and financial performance. On a consolidated basis, net sales increased 30% year-over-year from $649 million in 2015 to $831 million in 2016. Adjusted EBITDA grew from $216 million in 2015 to $298 million in 2016. Adjusted EBITDA margin in 2016 was 35.4%, compared to 33.3% in 2015. Adjusted EBITDA margin excluding third-party commercialization constructions [ph] grew from 36.1% with 41.7%. The gross in revenues EBITDA on margin is explained by the increased in sugarcane milling which contributed in fixed cost dilution, higher prices in dollar term for most of the commodities we produce and lower production costs in the farming and sugar and ethanol businesses using enhanced agricultural and industrial operations coupled with the depreciation of the Argentine Peso and the Brazilian Real. Let’s move on to Page 16. As a result, the strong operational and financial performance describe in the previous slide. Coupled with the conclusion of our heavy CapEx cycle initiated in 2006 Adecoagro has become free cash flow positive in 2016. This is a milestone year for the company and puts us in a strong financial and liquidity position. Internally we track and measure through non-GAAP cash flow measure. Free cash flow from operations represent the net cash generated from our operating activities after paying interest, taxes and working capital and maintenances CapEx. Maintenances CapEx is mainly related to the sugar and ethanol business and increased the renewal of sugarcane plantation and renovation of Ag machinery and the new equipment. We generated $133 million of free cash flow from operations in 2016. We also tracked free cash flow, we defined free cash flow as the free cash flow from operations after expansion CapEx. We made sure we retained the cash, we can use to continue growing, deleveraging or returning to our shareholders. We generated $85 million of free cash flow in 2016. We believe the sudden growth in adjusted EBITDA and free cash flow it's a strong indication of the quality of the assets we have built, the focus and dedication of our operating team's system to maximize productivity and efficiency and the benefit of our determination to be the lowest cost procedures for each of our product and our commitment to generating sustainable long term returns for our shareholders. Let's go to Slide 17, as you will see on the top left chart our gross indebtment as of December 31, 2016 stands at $635 million, while net debt stands at $437 million. I would like to highlight that our net debt has decreased by a $153 million compared to the third quarter of 2016 and by $47 million compared to a year ago. Primarily after we saw that the positive free cash flow generated during 2016 we proceeded to continue our deleveraging process. The combination of the free index coupled with growing adjusted EBITDA has resulted in a net debt to adjusted EBITDA ratio of currently 1.6 times compared to 2.4 a year ago. I'd like to mention that 68% of our debt remains in the long term including multilevel banks at very competitive rates as you can see on the bottom left chart. Last but not least let's move to Page 18. We are happy to announce that we will continue expanding our [indiscernible]. We began building our 3 million ton cash crop in [indiscernible] in 2006. We finished the construction in 2015 and operated at full capacity in 2016 for the first time. In addition we have successfully implemented the non-stop or continuous harvest production systems during 2016, which has allowed us to increase our normal capacity by 10%. The organic growth project consists of expanding the factory's crushing capacity by 3 million tons or 30%. Last year we were on 10 million to 13 million tons. It will be achieved by marginal investment in the Angelica and Ivinhema mill to eliminate specific bottle necks in the crushing and production processes. This project will be implemented over the next five years and total CapEx is estimated at a $166 million or $52 per ton. This includes granting [indiscernible] sugarcane supplies the new capacity. We believe this project represents a very attractive use of our capital and will allow us to continue generating strong returns and consolidate as one of the lowest cost producers. Thank you for your time, we are now open to questions.

Thank you, the floor is now open for questions. [Operator Instructions] And our first question will be from Antonio Barreto of Itau.

My first question is about the topics of the announced expansion. The total $166 million I saw that you divided in two phases, Phase 1 would be 55% of the CapEx but how should we think of how we distribute this CapEx over the next years and if you can give us a guidance on a year-by-year basis how we should allocate this CapEx would be extremely helpful.

Thank you, Antonio. I am going to ask Charlie to answer your question.

Basically, we will be investing in 2017 in increasing the investment capacity and mainly in expanding the planting area of $51 million. So I will say that 55% of the investments will be done in between 2017 and 2019 and the rest until 2022.

Yeah, but just a follow up on that, because that’s pretty much at the division that you guys made on the earnings release, right, between Phase 1 and Phase 2. But I think what interested me is between Phase 1 for example, what is it going to be between 2017, ’18 and ’19? Because it could make a lot of difference for our cash flow estimate.

It will be linear Antonio, I don’t know if that answers your question.

Yeah it does. Thank you. And my second question is about the perspectives of the productivity in 2017. I saw that you guys finished 2016 with 98 tons per hectare productivity you distributed in ethanol business and I was wondering because we know that you guys had a lot of true summer [indiscernible] cane in the last year and what are the perspectives for that in 2017? How much that could affect your productivity and in case you increase the crushing capacity already in 2017, how much cane from third parties will you need to fill your capacity there in 2017?

Antonio, thank you for your question. I want to take the opportunity that we have Marcelo Vieira our head of Sugar and Ethanol business here with us in the call. So I am going to ask Vieira to answer your question.

Thank you, Antonio. Our 2016 uses were above average due to the high level of rains in the last quarter of 2015 and first quarter of 2016. Therefore, it will be difficult to repeat the same yield seen last year. But we are also expecting a higher [indiscernible] content which should partially offset the huge reduction. However, it’s too early to predict that exact number and we are not changing our total production case needs and regarding the sugarcane from third parties, we have been talking to some of the third parties, with some news that having just the way our situation close to our new and we are buying some of that cane, but we don’t think that is necessary to reach the capacity that you're expecting.

All right. Just one additional comment and one of those questions is, you guys are expanding the 3 million ton and we know that you are planting your own sugarcane, but do you think it's going to be enough? When you look at the when the project is going to be concluded in five to six years, is it going to be enough to have this same share of own cane that you current have around 90%?

Yes, we'll continue to have that same share of own cane. In the long term we might have some more share of the pie at the beginning of the project, and we think that we are going to crush 10.5 million tons in 2018 and then we expect to grow the crushing 500,000 tons per year until we reach the final closing in 2023.

All right, thank you.

And the next question will come from Javier Martinez of Morgan Stanley.

So we have mostly the cash flow through the cycle, we have low and cheap leverage and ridiculously low if you talk about the loan to value, and you have in the capacity to invest in my calculation at $20 per ton ex-gains so it's a no-brainer probably [indiscernible] above 30%. So why are you doing this in the year? This is because of the life cycle of the cane, can you -- it is not possible to speed up that process A? B, and is this compatible with dividend, we want to see some dividend, you know that this is how [technical difficulty] and people are asking for that. I know that you are looking for other opportunities, but are we getting closer to the point where you decide to pay some dividend? I think it's compatible working with other, can you please give us some color on those?

Thank you for your question. The first question on why is that phase, I think you are right in the returns we can achieve with this and this margin of growth is a very important for our sugar, ethanol and energy business. And the returns are briefly high in this investment. The growth is only -- as Vieira explained, because the main limiting factor is the sugarcane availability and the sugarcane land availability and that’s what's available in our region and that's the main difference of our region and that’s why we can continue growing because that land is available. But if we want to grow quicker or faster than that, we may end up losing some of the benefits that we currently own, like the prices of leases of the land et cetera, et cetera. So we don’t want to lose the efficiency, and in order to maintain all this efficiencies and cost efficiencies, that’s a best phase of growth that we are projecting. Can we do it faster? If we can, we will do it, that’s what we are protecting today. And then for the second part of your question, I am going to answer more or less within the same way of thinking that we've been doing it before. We are always looking for the best use of our capital. So the number point is that we wanted to strengthen our balance sheet. That’s where we are getting to the place where we really feel comfortable as you just mentioned. And this level of that, will depend always on the returns on the growth projects we are analyzing. And we are really analyzing very different growth projects, I think the more clear one that we just announced because we know exactly all the details and we are -- it is a fact that we are doing it. But we are announcing many other difference within the same segments where we are, Argentina has some opportunities on this stage Argentina is generating some opportunities, but we think, we can achieve some interesting growth projects. But we are always very disciplined, we will be always comparing this with getting back to money to shareholders. So given back the money through dividends or shareholders is always open and is always within our discussions presently in the discussion where we are analyzing this different growth opportunities. So as we always said, we will continue to be disciplined in our deployment of capital, we have focus on returns and investment capital.

Thank you, Mariano. And talking about this potential use of capital. We know that you are designated and we know that you have proof that you have done a fantastic job. So can you frame that a little bit? So apparently with the news in the media that some of the things you were looking at in [indiscernible], it’s not there anymore. So can you frame a little bit the kind of things you are looking for or they kind of projects you are analyzing, so for us to have a framework on what may happen going forward.

Yes, sure. And we have here the way -- our way of thinking especially. First of all, this we are very keen on the same businesses where we have. All the marginal returns on the same businesses that we currently own are generally higher, where we see higher returns and lower risks. So that’s more obvious or where we think there is higher probability on things to appear or where we can deploy some capital. And then of course within the sector and within transforming vegetable portions into animal portions, that's something that makes sense for us. But there are a lot of things that have to be clear for us in order to invest or to deploy capital in something new and different -- or relatively different to our current businesses. So in order to summarize on rice, dairy and crops, we may see something with more clarity and with the other thing that you see in the press, the press talks whatever they want to talk, but it’s not the reality of what goes on in the company. So we’ll depend -- we feel really comfortable that we have a competitive advantage and we can beat the low costs producer and competitive worldwide with whatever business within the sector that we are getting into.

Very clearly. And Mariano one last one, if I may. So you're now testing potential use of the capital and you're looking for a land or farm for opportunities in Argentina, are we already seeing an improvement in the liquidity in the land market? Are you seeing any trend already there or that we lack of? So we have a theme that land has to increase in value a lot, but we don't have actual data, so probably you are now very close to those markets, what is your sense about liquidity and value of the land in Argentina?

Okay, good question. In terms of liquidity, we don't see a lot of liquidity going on in the market, neither in Argentina nor Brazil, Uruguay or Paraguay, so liquidity still low. And regarding prices, specifically in Argentina we've seen improved retention in terms of yield that the land generates so because of that we expect that that should be reflected in prices. And that's why we haven't sold a farm in the last quarter as we just reported. Whether can we buy or not or sell will depend on the returns and we are always going to continue to be disciplined either buying or selling. So we are pursuing opportunities, but we cannot assign any probability to doing or not to doing.

Very good, congratulations.

And the next question comes from Bettina Rossouw of Bank of America.

My first question is regarding your thoughts on sugar prices. Even though there is the impact of seasonality in the recent decline of prices questions on whether Indian [indiscernible] increased or not have impacted prices as well, so what's your view on supply-demand and prices for the next crop, and do you think that that could be lower than expected? Thanks.

Thank you, Bettina, I'm going to ask Marcelo Sanchez our Commercial Director to answer this question.

Good morning Bettina, as you pointed out India has the considerably maintained the prices that are supportive within the last five or six months, and given competition of course is pointing to a recovery of production for 2018 and that's for sure, we should raise the prices, and -- however this assumption considers normal weather and conditions and therefore are very vulnerable to whether issues. Than pricing is already showing that for 2018, I think that prices are in level by considering all this, [indiscernible] considering the market's normal.

Okay thank you, do you see any weather impact on El Nino for the next crop as you have seen some news raising this concerning again.

That could be the case. So far pricing is considering normal weather, of course if El Nino happens to be developing and of course we're going to be impacting next monsoons in India and Thailand, the case will be that the prices will be supported positively.

Okay, thank you.

The next question comes from [indiscernible] of Bradesco.

My first question is a little bit of a follow-up to one of my colleague's questions non-unique [ph] strategy. So are you seeing opportunities to expand into the southeast with your sugar and ethanol operation? We had been hearing that there are some assets out there in the market and about your financial position right now. Do you seek to decrease your current leverage, are you comfortable with working with higher leveraged level of moving around two times and lastly you are forming, just talking about your forming operation in Brazil and 98% of your EBITDA in this quarter was from sugar and ethanol? So what you think, you’re going to focus more on sugar and ethanol here in Brazil and do you see possibilities that maybe this continues to get massive from your forming business, so a little bit of color on that would be great. Thanks.

Thank you, for your question. I want to start from the last part of your question, as I mentioned we are looking things at the sugar and ethanol business and we are increasing with this growth project that we are presenting. When we compare sugar and ethanol and the rest of the farming land transformation business, we like to compare that as the EBIT level and as the EBIT level, the farming and land transformation is more relevant in terms of the reach, but of course sugar and ethanol has become the most important business in our whole operation. If we continue in this disciplined way of analyzing our growth opportunities, we have continue to look for a best return and looking for this best result we are also open to continue growing on the sugar and ethanol and all the other businesses. So within the sugar and ethanol and you were asking about the M&A opportunities in the Southern region, of course we’ve been travelling all around the Southern areas, we’ve been looking at the many, many mills that are for sale in Brazil but we will only -- we are only interested in the ones where we really believe that we can meet the low cost producer or within the low cost producer. And for us one of the key things on understanding this difference is the sugarcane availability. So it is very important for us what’s the potential of the area of the sugarcane availability. And we’ve seen many need for sale where that was a problem, so we are not interested on those types of things. In order to summarize, are we open for M&A, yes we are looking at things and we think we can take an opportunity, but on very, very few ones and where we feel this very sure that we can meet the local producer and very competitively.

That’s great, thank you. Could you just talk a little bit about your cost right now in terms of dollar-cents per pound and what do you think is the level that you guys -- your target level in terms of this metric?

I am going to ask Charlie to answer this question and also to complement on your first question regarding our debt level. Charlie?

I would say that for 2015, our cash cost was $8.5 per pound. 2017 obviously, would depend on if the volumes will crash and we facing on capital variables, but we would be aligned with the 2016 figures. In terms of the debt as we said, we are comfortable in terms of the debt level that we have on ongoing operations. But as we have a strong balance sheet, that puts us in a position that we will be able to raise more debt, if it happens that we need more money to grow either through M&A or we have a very good opportunity to grow organically.

Okay guys that’s great, thank you, thank you very much.

We have a question from Nicholas [indiscernible] of ASP Habitat.

I have a couple of questions, the first one is about your growth opportunities. You mentioned you're focus on [indiscernible] generation, but what kind of industries are you targeting? You mentioned that poultry business, what about the cattle growing business? Can you give us like a brief overview of your strategy, your view on those markets, how do you see your company advantages and how do you see right now, Argentina advantages in those markets? And my second question is about net leverage, what your target? Thanks.

Okay, Charlie will answer the last question on net leverage, that I think he has already explained something.

Hi Nicholas, yes as we said, we are comfortable on the levels that we are reaching and we don’t have a specific figure. I would say that in this ranges we feel comfortable, especially considering our debt structure which is almost two third, so 70% in long term. So I would say that this will depend on how we continue pursuing opportunities that have excellent returns that could make us take advantage of our low leverage and good balance sheet to raise a little bit more of debt to help us to grow.

And regarding growth, as I mentioned before the main things we are looking at in Argentina, as you're particularly asking about Argentina, is on the rice business, where we see opportunities to continue growing with the same business where we are. And then on the dairy business, where we also have relatively small business, but we see opportunities to continue growing there. We have a very specific model that this free style [ph] model, where we've achieved very interesting returns and in a very difficult year for this specific sector in Argentina like 2016 we were able to make money and achieve reasonable returns. So with today's price in that specific sector, we are seeing more attractive or we are getting much better returns and we are seen much more attractive opportunities there. So that we are particularly looking at. Then when you think on Portugal, [indiscernible] things are within our sectors [technical difficulty].

Hello. Yes.

Okay. So sorry we had an interruption on the connection. So in terms of Portugal really for those type of businesses, are things that are within the scope, but we need to find our competitive advantage, we need to feel that from Argentina, we can be local producer for the whole world and not only for the domestic market in Argentina. So we need to understand many things in order to participate on one of these businesses and we need to understand how is it that we're going to manage this, manage businesses within the interior of the interior of the countries is not an easy thing. So we need to [indiscernible] that's going to take a year [ph]. There are many factors that we are always looking when we analyze these type of thing. Can we do them, yes but on top of that. We need to have a clarity that we are going to obtain about 20% returns. So at the end of the day, we have to find very attractive returns in order to look or things like that.

Okay. Thank you very much.

[Operator Instructions]. And we do have a question from Tom Burke of Canaccord Genuity.

Yes. Hi guys. Calling from Montreal, Canada and I can assure you that there is no competition in sugar production coming from Canada any time soon, so you can stay calm on that one. Gentlemen, just on one component of the business that was not brought-up today is the cogeneration in the energy sales. Obviously, you had a big delta in Q4 on the exported energy, the efficiency ratio. Can you discuss that a little bit more at length and talk about where you can take that part of the business?

Yes. Sure. Thank you, Tom. Particularly when we analyze the quarter, we did some carry from the third quarter to the fourth quarter in terms of the buy-out [ph]. So the portion of the sugarcane that is the buy-out, is something we can carry some way from one quarter to the other and because there were lower prices in the third quarter and we were foreseeing better prices for the fourth quarter, in fact we did this carry. So particular for the quarter the 80-something megawatt hour per ton is a little bit higher than what we can expect annually and when we think annually we should expect the 70 or around 70 to 75 megawatt hour per kilogram of cane. So that’s basically what happened particularly in this quarter, but as we always mention a very important competitive advantage to that our mill have this capacity and a very high capacity for the industry to produce electricity from the bagasse. So that's a very competitive and very important competitive advantage and the overall energy efficiencies of this brand new cluster are very important.

Okay great, thanks, appreciate that, great quarter guys, thanks.

Our next question will come from George Nicholas of EMF.

Hi, it's Edmund. I was wondering if you guys would consider selling some of your farms that are mature and well stabilized irrespective of whether you have investment opportunities that meet the IRR targets. So just thinking about the big gap there is between the appraised view and where this stock trades.

Hi Edmund, yes we are always looking at potential buyer for the farms and when we have achieved a price at which when we calculate future returns, we achieved that same price, where the returns going forward are lower than a certain number and we can reallocate that money into something more accretive and when we think on reallocating the money to something more accretive. Of course as I mention before, we have all these different opportunities where we are including dividend or buyback or the [indiscernible] that you were mentioning.

Okay thank you.

[Operator Instructions] And 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.

These are very important times for Adecoagro, we certainly reached an inflection points, and the future looks very promising. As we look ahead, our strategic priorities are to further strengthening our balance sheet, deepen our focus on sustainability, managing our exposure to the commodity cycles and seeking for growth opportunity. I would like to finish by reiterating our gratitude to all the operational and management team and the support of our stakeholders. Thanks to the [indiscernible] effort and hard work, we will become the low cost producer of food and renewable energy and while at the same time generate value and effective return to all of our shareholders. Thank you for joining the call and look forward to seeing you soon.

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