Adecoagro S.A. (AGRO) Q4 2019 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 2019 Results Conference Call. Today with us, we have Mr. Mariano Bosch, CEO; Mr. Charlie Boero Hughes, CFO; and Mr. Juan Ignacio Galleano, Investor Relations Manager. We would like to inform you that this event is being recorded. [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 and 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 of Adecoagro, and could cause results to differ materially from those expressed in such forward-looking statements. Now I'd like to turn the conference over to Mr. Mariano Bosch, CEO. Mr. Bosch, you may begin your conference.

Good morning, and thank you for joining Adecoagro's fourth quarter results conference. As you are aware, the entire world is going through tough time. The coronavirus disease spreads across the globe. And we are starting to see major impacts on businesses and financial markets as well as international trade and commerce. Given the current circumstances, we have been responsive to protect our people and community and our different businesses. We have activated internal protocols and implemented precautionary measures to reduce the chances of being affected by the virus, both from an individual and economic standpoint. There are times where our constant discipline and strategy of focusing on increasing operational efficiencies and being low-cost producers definitively pays off. And let me emphasize this once more. It's the only way to achieve sustainable profits even during the current circumstances. For this reason, but without underestimating the challenges ahead, we feel confident that we will overcome this situation and generate good results. I must say that it's not only at an operational level that we feel we are well positioned, we also have a very strong balance sheet, with an average life of over 6 years for our debt and an almost 2x liquidity ratio. In this line, I'm proud to say that last December, taking advantage of market conditions, we successfully issued a 7-year local bond in Brazil for a total of BRL 400 million at a very favorable terms and conditions. Moving now to the performance of the company during 2019. I would like to highlight the strong operational and financial figures that we registered in all of our businesses. In our Sugar, Ethanol and Energy business, we managed to increase adjusted EBITDA by 6% despite adverse conditions. As you may all be aware, 2019 has been a challenging year weather-wise in Mato Grosso do Sul. The combination of dry weather conditions, coupled with the frost that hit part of the plantation in early July, led to a 15% reduction in yield. Despite this significant impact, we managed to reduce cash cost by 4%, reaching $0.09 per pound. At the same time, we maximized ethanol production to a profit from higher relative prices, diverting as much as 85% of total TRS produced, a record high. Something similar occurred with the energy as we managed to export more than 800,000 megawatts hour at an efficiency as high as 79 kilowatt hour per ton being crushed. As far as our prospects for 2020, sugarcane plantation is developing properly and all of our teams and equipment are operating at full capacity. At the same time, we are prepared to fully profit from the recently inactive government program, RenovaBio. Indeed, all of our mills were certified, ranking in the top positions and our cluster is already issuing the carbon credit. Lastly, our flexibility to produce sugar and ethanol, and within ethanol, dehydrated or hydrated, put us in a very good position to profit from the different price scenarios. Regarding our Farming businesses, higher results were mainly driven by the good performance in our Dairy and Rice businesses. At the farm level, we continue reaching high productivity levels despite the larger herd. At an industry level, in less than 1 year since the takeover of the plant, we were close to reaching our processing targets and are already generating positive EBITDA. In the case of our Rice business, higher sales and lower cost of production on a per ton basis explains the higher results. The current harvest of the summer crop is developing in good conditions, and so far, we are achieving above-average yield. It's also worth remembering that we have full flexibility to divert sales to the domestic and to the export market, depending on price scenario. We have a year full of challenges ahead of us. However, as I said, we feel confident that we have the right teams, and that we are following the right strategy to overcome the situation and generate good returns and value for our existing shareholders. In this line, I would like to remember all that, as we have anticipated in the past releases, our 5-year plan is finally coming to an end. Most of the committed CapEx has already been deployed. As a result, this year should be a turning point for the company as it will be the first year to become free cash flow positive since we started the investment. We are confident that we now have a more solid asset base to better face any potential adverse scenario, going from bad weather to falling prices. So 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, with a brief analysis on the rains in Mato Grosso do Sul. As seen on the chart, rains in our cluster in Mato Grosso do Sul during the 12-month period of 2019 were 35% below the 10-year average and also 35% below the same period of last year. I would like to remind everyone that in addition to the dry weather, in June 2019, our cluster was hit by a frost. The combination of these 2 effects, stunted sugarcane growth, making us to reassess our crushing plan going forward, which leads me to Slide 5, where I would like to discuss crushing activities throughout the year. During 2019, a total of 10.8 million tons of sugarcane were crushed, 4.5% lower compared with 2018. As said, this is explained by our strategic decision to slow down the crushing pace, with a goal of allowing our sugarcane fields to recover from the effects caused by the weather conditions previously discussed. Our slower crushing pace is evident in the 15.3% decrease in milling per day despite a 12.7% increase in effective milling days. Implementation of this strategy, coupled with the normalization of range as of last November, will allow our sugarcane to continue growing at the fields and reach optimal conditions to be harvested at its peak in the upcoming quarters. Please jump now to Page 6, where I would like to walk you through our agriculture productivity. As a consequence of the dry weather during most of 2019, sugarcane yields in the fourth quarter were 23% lower than in the fourth quarter of 2018, reaching 68 tons per hectare. The lack of rains, in turn, favored sugar content. In fact, TRS during the quarter reached 145 kilo per ton, 17% higher than the previous year. The combination of these two effects, resulted in the TRS production per hectare of 9.9 tons, 8.7% lower year-over-year. Let's move ahead to Slide 7, where I would like to discuss our production mix. As you can see in the top left chart, during the fourth quarter of 2019, anhydrous and hydrous ethanol in the Mato Grosso do Su traded at an average price of $0.161 and $0.0152 per pound sugar equivalent, 25% and 18% premium to sugar, respectively. In this context, all our efforts were focused on maximizing ethanol production. Indeed, during the fourth quarter, we reached a record high of 94% of TRS production diverted to ethanol, aided in part by the fact that the slower production pace means our ethanol distillery could operate without capacity constraints. On an annual basis, 85% of the extracted sugarcane juice goes to ethanol, explaining the 12.1% increase in ethanol production year-over-year. As you can see in the bottom left chart, I would like to insist that this high degree of flexibility constitutes one of our most important competitive advantages, since it allows us to make a more efficient use of our fixed assets and sell the product with the highest marginal contribution. As a result of this strategy, during 2019, ethanol accounted for 78.1% of total EBITDA generation in our Sugar and Ethanol business, while sugar accounted for only 8.3%. Let's please turn to Slide 8, where I would like to discuss annual sales. As you can see on the top of chart, ethanol sales volumes increased by 20.2% compared to the 12 months of 2018. As previously mentioned, this responds to our strategic decision to maximize ethanol production to profit from higher relative prices. Average selling prices during the year decreased by 1.2% in U.S. dollars, reaching $0.16 per pound, but still traded at a significant premium to sugar. All in all, net ethanol sales reached $337.1 million, marking a 15.5% increase compared to the 12 months of 2018. In the case of Energy, selling volumes reached 994 megawatt hour, marking a 33.5% increase, explained by the large bagasse availability as a result of higher inventories carried from 2018, coupled with our decision of burning wood chips from the beginning of the year. Average selling prices were $54 per megawatt hour, marking a 21% decrease compared to the same period of last year. Overall, net sales increased 5.4% compared to the 12 months of 2018, reaching $53.6 million. Sugar sales volumes during the year were 337,000 tons, 25.3% lower year-over-year. Average net selling prices reached $0.122 per pound, 0.5% lower compared to the 12 months of 2018. As a result, net sales reached $97.2 million, 24% lower compared to the 12 months of 2018. Let's move to Slide 9, where I would like to explain our total cost of production. Total cost of production depicts, on a cash basis, how much it costs us to produce 1 pound of sugar and ethanol in sugar equivalent. Maintenance CapEx is included in the calculation since it's a recurring investment necessary to maintain the productivity of the sugarcane plantation. As we are calculating sugar and ethanol cost, energy is deemed a byproduct, and thus deducted from total costs. As for the tax recovery line, it includes the ICMS tax incentive that the state of Mato Grosso do Sul granted us until 2032. As shown in the table, total cash cost in 2019 marked a 3.8% reduction on a per unit basis, reaching $0.09 per pound of sugar equivalent. This decrease was explained by enhanced agricultural efficiencies, such as the automatization of the agricultural process and implementation of [indiscernible], combined with a year-over-year depreciation of the Brazilian real as well as greater cogeneration and tax recovery. The $0.004 per pound reduction in total cash costs evidences our full commitment to being a low-cost producer. Finally, to conclude with the Sugar, Ethanol and Energy business, please turn to Slide 10, where I would like to discuss financial performance. Adjusted EBITDA for full year 2019 totaled $253.1 million, marking a 6.2% increase compared to 2018. The main drivers for the increase were lower production costs, higher selling volumes and higher results derived from the mark-to-market of our unharvested sugarcane, partially offset by the mark-to-market effect of our commodity hedge position. I would now like to move on to the Farming business. Please direct your attention to Slide 12. By the end of the fourth quarter of 2019, Adecoagro finished its planting activities for the 2019/'20 harvest year. We planted 238,000 hectares, 3.8% higher than the previous harvest season. This increase is expected to come primarily from a greater leased area, partially offset by a 4% decrease in owned land as a result of the sale of Alto Alegre farm during the first quarter of 2019. Since November of 2019 to date, Argentina has been receiving timely and favorable rains, allowing for the proper development of the crop. Let's move to Page 13, where I would like to walk you through the financial performance of our Farming and Land Transformation businesses. On an annual basis, adjusted EBITDA in the Farming and Land Transformation businesses reached $71.7 million, $24.6 million or 25.6% lower year-over-year. The decrease in financial performance is primarily explained by the $26.9 million lower results generated from farm sales, coupled with lower commodity prices. For the Crops business, we generated an adjusted EBITDA of $26.8 million during the first 12 months of 2019, 22.6% or $7.8 million lower compared to the same period of last year. This decrease is mainly explained by the combination of lower commodity prices, coupled with lower results from the mark-to-market of our commodity hedge positions. These results were partially offset by higher sales. In the case of the Rice business, adjusted EBITDA reached $20.3 million during the 12-month period, 8% higher year-over-year. This was mainly explained by higher selling volumes. Regarding our Dairy business, adjusted EBITDA reached for $14.9 million, 108.2% higher year-over-year. Higher production and selling volumes coupled with higher average selling prices were responsible for the increase in financial performance. At the same time, higher selling volumes were driven by a 19.6% increase in our average cow herd as we continue populating our third free-stall facility according to plan. Lastly, during 2019, the company completed the sale of Alto Alegre farm, resulting in an adjusted EBITDA of $9.4 million. Compared to the results generated by the sale of Rio de Janeiro and Conquista farms during 2018, it represents a 74.1% decrease. Let's now turn to Page 15, which shows the evolution of Adecoagro's consolidated operational and financial performance. As shown on the top right chart, on a consolidated basis, net sales in the first -- 12 months of 2019 reached $848 million, 10.1% higher year-over-year. This, as we have already seen, is mainly explained by the higher selling volumes in all our businesses and higher mix selling prices, partially offset by the combined effect of lower prices measured in U.S. dollars for sugar, ethanol, energy, rice and most of our crops. Adjusted EBITDA totaled $305 million during 2019, 3% lower compared to the same period of last year. As previously explained, the good result in our Dairy, Rice and Sugar, Ethanol and Energy businesses were fully offset by the financial performance of our Crops and Land Transformation businesses. Despite this, profitable results were achieved in all of our businesses. To conclude, please turn to Slide 16 to take a look at our net debt position. As you may see in the bottom left chart, our gross indebtedness as of December 31, 2019, stood at $968 million, while net debt stood at $678 million, 10% or $75 million lower compared to the previous quarter. This evidences the beginning of a positive free cash flow cycle as most of the investments related to our 5-year growth plan have already been deployed, and we are consolidating and ramping up the operations. Net debt ratio reached 2.25x, 18% lower compared to the previous quarter. We consider our balance sheet to be in a good position, considering not only the adequate debt level, but also its long-term tenure, being the average maturity over 6 years. At the same time, we expect the net debt ratio to continue decreasing due to higher EBITDA generation. At the same time, the liquidity ratio, which is calculated as cash and equivalents plus marketable inventories divided by short-term debt, reached 2x in the fourth quarter of 2019, 44% higher compared to the previous quarter. Any value above 1 point shows the full capacity of the company to repay short-term debt with cash balance and marketable inventories without raising external capital. Lastly, I would like to take a moment to explain how the recent macroeconomic events impact Adecoarg's figures. In this slide, it is worth highlighting that the mitigants of international oil prices in the composition of ethanol prices at the pump ranges from 30% to 40%. The 60% to 70% balance depends on domestic factors, such as freight cost, taxes, margins and gasoline-ethanol parity, which are denominated in Brazilian real. Although we see our revenues being impacted by gasoline and sugar prices, in addition to the depreciation of the Brazilian real, which negatively impacts our Ethanol and Energy revenues, I would like to point out that there are mitigants to the impact of these factors. Indeed, 52% of our sugar volumes has been hedged at $0.141 per pound and 15% of our ethanol volumes have already been sold at BRL 2,400 per cubic meter. In terms of costs and capital expenditure, as they are mostly denominated in Brazilian real, we see a positive impact derived from a greater devaluation in addition to a positive impact in our diesel costs by the drop in gasoline prices. So far, these effects should cause a preliminary drop of 5% to 8% in our 2020 EBITDA focus and cause a neutral or slightly negative impact in our free cash flow. Thank you very much for your time. We are now open to questions.

[Operator Instructions]. The first question today comes from Fernanda Cunha with Citibank.

Congratulations on the results. My first question is in regards with commodity prices and the BRL devaluation we have seen recently. Can you comment on your views of how much -- what's your outlook for sugar and ethanol prices? And also how you're looking at your mix for this crop here? And my second question is in regards to the cost. If you could give a slight more guidance of how you think costs, especially here in the sugar and ethanol business, will be affected this year? And if you could explain how much the BRL devaluation should actually hit your production costs? Just -- would it be fair to say that at the BRL devaluation, we could still see costs dropping around $0.005 per pound, if you could give more guidance on that, that would be great.

Fernanda, thank you for your question. I want to ask Renato to get through both of the two questions. First, on the sugar and ethanol mix and how we are thinking there, and then on the cost part and how the real devaluation affect us. So Renato?

Fernanda, thank you for your question. It's important to highlight, as Charlie mentioned, that the refinery price, which is set by Petrobras and affected by oil price volatility, accounts for only 30% of the total composition of gasoline sold at the pumps, which means that any movement in oil will mostly affect that parts related to the refinery. Also, the Brazilian real devaluation helps to mitigate the impact of low price. Lower oil shouldn't lead most mills and center [indiscernible] to maximize sugar, and it should result in a reduction in ethanol production of approximately 4 million cubic meters what, in our view, is margin and [indiscernible] offset and negative impact in demand, preserving high parity ratios at the pumps. Regarding the costs -- the proportion of the CapEx and cost that is in real denominated is between 90% and 95%. Therefore, the devaluation of 15% in Brazilian real reduces our costs and CapEx in about 13%. It's important to highlight that our total CapEx for 2020 is already negotiated in reals. And for this reason, there is no risk of -- to have our supply adjusting the price as a consequence of the currency devaluation. I think our final cost in cents per pound would be close to $0.085 per pound.

Okay. And can you just give any color on how much of this feedstock you have already purchased for this crop year?

Sorry, again the question?

How much -- if you just can give like an overview of how much of your feedstock of your production costs that you have already purchased for this year?

From the CapEx side, we have already bought everything. So everything is already negotiated in reals. So no chance of the price change. And regarding the cost, almost 100% of our input is already priced. So we see a very low increase in our cost for the real devaluation.

[Operator Instructions]. The next question from comes from Thiago Duarte with BTG.

I have the three questions. The first one is related to sugar and ethanol as well. If I could just go back a little bit on this discussion about the mix between sugar and ethanol in 2020. Renato, I understand your arguments with regards to the mitigations that the market -- the market prices on ethanol and gasoline should have based on the Brazilian real depreciation and so on and so forth. But just to get a sense, I mean, in your calculations or your estimates, if we assume the spot price for Brent and the fact that Petrobras is possibly going to keep the import parity of their gasoline price at the refinery, would you say that your mix between sugar and ethanol in 2020 is going to be very different from 2019 or not? Just for us to get a sense of where you're seeing your profitability between the 2 products, considering the market prices. That would be the first question. The second question is related to crushing volumes in 2020. I think it's very clear for us at this point the reasons why crushing volumes were lower in 2019. But considering that you are expanding your planted area, and considering that you took the decision to keep the cane in the farms for longer given the impact of the frost and so on, can you provide us some sort of indication of whether you could be crushing closer to 12 million tons this year already? Or for any reason, you should not, just for us to get a sense of your recovery base there? And finally, just considering the ups and downs of the different currencies in Brazil and in Argentina, can you clarify for us regarding the expansion CapEx for 2020? How many dollars you expect to be spending this year considering the very final phase of the 5-year plan, that would be very helpful? And that's, of course, for Sugar and Ethanol and for Farming and Dairy as well.

Thank you, Thiago, for your question. Regarding the first part of your question, as a TRS producer, our strategy is always to maximize. The product is more profitable at the moment. And our high flexibility gives us the advantage to always arbitrate the products. As we -- now currently, as we continue in the offseason periods, now in Mato Grosso do Sul, we remain paying 14% of premium for hydrous and 20% for anhydrous. In our mill in Minas Gerais, however, product is already -- is likely favorable to sugar. For the remaining part of this season, considering that the Mato Grosso do Sul has a tax rebate, we think that we are going to be maximizing ethanol in Mato Grosso do Sul and sugar in Minas Gerais, but of course, this can change. And we are -- and our flexibility will give us opportunity to change according to the market. And regarding your second question about the sugarcane outlook, I think as the consequence of the normal rains that we had in December, January and February, we have a better sugarcane outlook for 2020. The yields of the first half of the year will be -- will still be impacted by the drought that you had in '19, but the situation should improve at the beginning of the third quarter as we will be crushing sugarcane with normal development. We had a very good planting in 2019, and the sugarcane will be harvested in the second semester. The sugarcane -- regarding our mill in Minas Gerais, the sugarcane outlook is fantastic and we started crushing very early this year. Actually, we started on March 8. This scenario will allow us to crush, I'd say, close to 11.5 million tons of sugarcane, of course, depending on the weather.

Thiago, just to complement on the mix, we also have to take into account the RenovaBio program that also favors a little bit more on the ethanol. So the important part is the flexibility, but we are now adding something else on the calculation. And the other important part, in regards to our strategy, is to take into account the amount of storage at the mills that we have, that this gives us additional flexibility to maximize the price of ethanol, as we've done this past year. So this past year, all the investment done in storage has been paid in the year. So we make more money with the strategy of storage than the total cost of the CapEx of this -- of the whole times. Just to clarify or to add that on to Renato's answer. And then on the last part of -- or your last question, the third question regarding the Capex. On the $50 million to $60 million remaining CapEx to complete the 5-year plan, that is what is still happening in 2020, most of it has already been committed or expensed in part. And as Renato was explaining, more than 80% of that is in sugarcane plantation, and the sugarcane plantations are mainly in reals. That's why we can expect that to be reduced in line to what the numbers that Renato has already explained.

The next question comes from Christian Audi with Santander.

A couple of questions. First, on the demand side, given the impact that coronavirus may have, and I know it's a challenging dynamic to try to quantify the impact it could have on demand, but how are you going about, thinking about that? In other words, the impact that you could have on the demand for your ethanol and the demand for your sugar or any other products? The second is going back to a little bit of a discussion on pricing that we were having. So as oil prices come down, gasoline prices in Brazil come under pressure even with the depreciation of the real, which will likely pressure ethanol prices in Brazil, which could lead you to want to shift some of your production to sugar, but that, in turn, could pressure sugar prices. So can you talk a little bit more about that? At the end -- I understood your point about mix, that you have the flexibility, which is great, but at the end, what is your outlook given this macro situation for sugar prices as a whole? Because it seems to me that as you were -- as you shift from ethanol to sugar, that could also put pressure on sugar prices given the increased production. So if you could add a little bit more color there that will be very helpful, please.

Christian, thank you for your question. Renato will address, and then I can complement. Renato?

Thank you for your question. As I mentioned, we have a high flexibility in our mills to switch the production from ethanol to sugar. In Mato Grosso do Sul, as was mentioned, we have the tax rebate and also the -- even the tanks availability to sell the ethanol at the peak of the price in the offseason. So we believe, at this point, that we are maximizing ethanol in Mato Grosso do Sul because of those 2 points. In Minas Gerais, the mill has a lot of flexibility to produce sugar. Actually, Monte Alegre mill can produce up to 7% sugar, and we think we will be producing sugar. But of course, we are going to be paying attention to the market to arbitrate according to the prices in the coming months.

And just to follow up. That's very helpful. How can, I mean, obviously given that sugar prices already had an important correction rate, but as you make that switch, which is a great flexibility that you have, as you explained, that would bring more sugar into the world's production rates, not just you, but Brazil as a whole. And wouldn't that be an added pressure point for sugar prices globally to have more sugar coming in as you switch from ethanol to sugar production?

Yes. But the fundamentals of sugar is very good. So the crop is almost over, and it should be reduced by 6 million tons of sugar in Thailand. Indian harvest remained behind last year and sugar production should reduce to 27 million tons versus 33 million last year. Even if higher production coming from Brazil, most analysts are expecting a dearth for the current season between 7 to 11 million tons of sugar in the world. So I think that the fundamentals of sugar is still very good. Once we pass this particular moment over the sugar, we will go back.

Christian, also to complement, in soybean, for example, the fundamentals are still there and are similar to what we saw before the crisis. And yesterday, as an example, China bought 20 barges of soybean. So that's going on and the demand, we still see there. That's why, in terms of the fundamentals of the commodities that we are producing, apart from sugar, we still see that there.

Great. And any color on how you're going about thinking on the demand side for your products, given this very fluid uncertain dynamic with the coronavirus?

I think it's too early to predict any impact on demand. It depends a lot on the growth of the world and Brazil. So we expect that we are going to be -- our demand is reducing a little bit, but it's too early to give any final number. You remember that we produce items that people, all will be consuming, for example, sugar. So I think the impact should be lower than other products.

[Operator Instructions]. The next question comes from Ezra Cohen with EMS.

It's Edmond Safra. I'm sorry, I joined the call a little delayed and I didn't catch the part in your comments where you give a little bit of guidance. Could you repeat what you said earlier? Also the quality of the call wasn't very good, so -- that's why I didn't catch it.

Sorry, Ezra, can you clarify your question, please?

Mariano, It's Edmond. Just -- on your final section of your comments, you gave a little bit of color on your profitability, but we couldn't catch it very well. The line wasn't very good. Profitability going forward?

Sorry, I think I am not getting exactly in which part, but we didn't give any specifics on the profitability going forward. What we said is that we are very well prepared for challenges ahead. But maybe we -- Charlie can go through the last part of his presentation.

Edmond, it's another variable still with a lot of volatility. But just making an exercise, if we factor the current commodity prices and how that is being offset by the benefit of having most of our cost in reals in Brazil and in pesos in Argentina, which, in some way, mitigates the downturn of the commodity prices. So far, we could be expecting a reduction between 5% to 8% on our projected EBITDA. So that's a way of having a clue or an idea on how all these changes could be affecting our EBITDA performance.

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

Thank you, everyone, for joining the call. And just to transmit that we are very well prepared for the challenges ahead, and we will continue to be the low-cost producers of all the commodities we are producing today. So thank you for joining.

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