Adecoagro S.A. Q1 2023 Earnings Call
Speaker 1: when fueling trucks, buses, tractors, and light vehicles. Yvie Niemma Mills Biogas Plant is an innovative project developed via a partnership between Adeco Agro and Methanone and was the first in Brazil
Speaker 1: to be certified to issue the country's first gas wreck. Using all VINAS to produce biomethane would allow us to replace 100% of the diesel use in Adeco Agros operations, making our fleets sound sufficient.
Speaker 1: and using only renewable fuel. And all of this is based on our own and Brazilian technology.
Speaker 1: Adecco Agro, growing energy.
Speaker 2: Good afternoon ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Adecco Agro's first quarter 2023 results conference call.
Speaker 2: Today with us we have Mr. Mariano Bosch, CEO , Mr. Emilio Nieko, CFO , Mr. Renato Junqueira Pereira, Sugar, Ethanol and Energy VP, and Mrs. Vittoria Cabello, investor relations officer. We would like to inform you that this event is being recorded and all participants will be in listen.
Speaker 2: eco-ago management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depends on circumstances that may or may not occur in the future. They should understand the general economic conditions.
Speaker 2: industry conditions and other operating factors could affect the future results of a decoagro and could cause to differ materially from those expressed in such forward-looking statements.
Speaker 2: Now, I'll turn the conference over to Mr. Mariano Bosch, CEO . Mr. Bosch, you may begin your conference.
Speaker 3: Good morning and thank you for joining ADECO AGROS 2023 First-Waters Research Conference. Before going into the results of our operations, a brief update on distributions. Last month, our annual shareholder meeting approved.
Speaker 3: a total cash dividend of $35 million to be paid during 2023. This part of our distribution policy represents approximately 32 cents per share, equivalent to 4% dividend yield. Those dividends will be distributed in two equal installments of $35 million to be paid during 2023.
Speaker 3: shares equal to 1% of the company's equity.
Speaker 3: To comply with our distribution policy, during the rest of the year we must repurchase at least an additional $30 million in shares. Now, let's go into the highlights of our operations.
Speaker 3: Consolidated adjusted EBITDA during the quarter reached $89 million, slightly higher than the previous year, although we experienced the worst drought of the last 100 years in Argentina and Uruguay. I think this achievement shows the importance of our diversification.
Speaker 3: Talking about diversification, we have four different segments, crops, rice, and dairy in Argentina and Uruguay, that suffer the drought in different manners, from a huge impact in crops to almost none in rice and dairy.
Speaker 3: And one segment in Brazil, our sugar, ethanol and energy that is doing excellent. Now, starting from the most affected segment, our crop business simply broke even compared to the $18 million generated last year.
Speaker 3: We are in the middle of the harvesting activities and we expect to have 30-40% reduction of yields compared to the previous year. The good news is that the effects of the drought are over. As of July this year, we will start our new agricultural campaign with a forecast of El Nino, which means good rains.
Speaker 3: In the rice business, we completed harvesting activities with only 6% reduction in yield, but better prices and logistics, so we had better margins. We expect to continue to benefit from this. In the dairy business, we continue in line with the previous year with some increase in price.
Speaker 3: doubled compared to last year. Because of this, we crashed five times more cane and we are one of the few players to produce sugar during the traditional interharvest period. The outlook for this segment looks very promising and price scenario is very constructive.
Speaker 3: percent to anhydrous end. Fundamentals are supportive to sugar prices going forward and we are uniquely positioned to profit from this as we have more than 50 percent of our sugar still enhanced. Another development we are very excited about.
Speaker 3: involves the production of renewable energy from Vinyas. After more than 10 years developing the technology to produce biogas, we have reached the stability in production and its conversion into biomeson. We recently became the first player to run its vehicles on biomeson.
Speaker 3: fully produced from vinyas, effectively replacing diesel consumption. We are building a second biodigester which will double our biomesome production resulting in additional cost savings and the improvement of our carbon footprint.
Speaker 3: Full is case that this project has the potential to replace our whole digital consumption of more than 50 million liters. This process technology will also open doors to new business opportunities. We are very proud of this achievement which shows the benefit of our circular business model.
Speaker 3: and is a clear example of the innovative approach we implemented in our different business units.
Speaker 3: To conclude, I want to congratulate our team for constantly working towards becoming the most efficient and sustainable producer of food and renewable energy. We have a year full of challenges ahead of us, but also great opportunities. I feel confident that if we continue focused on our day-to-day operations, we will be able to make a difference.
Speaker 3: we will continue to generate good returns and value for our shareholders.
Speaker 3: Now I will let Emilio walk you through the numbers of the quarter.
Speaker 4: Thank you, Mariano. Good morning, everyone. Let's start on page 4 with a summary of our consolidated financial results for the quarter.
Speaker 4: Gross sales amounted to $247 million during the first quarter, making a 20% increase year over year. This was explained by both our operational and commercial decision to favor sugar production to capture the price premium over ethanol. In addition, our rice operations reported a $22 million increase in revenue.
Speaker 4: total 89 million dollars, 3% higher than the previous year.
Speaker 4: This is explained by an outperformance of the sugar, ethanol, and energy business driven by ample sugarcane availability thanks to the expansion planting activities conducted throughout the last years coupled with solid productivity indicators.
Speaker 4: Thus, its greater performance fully offset the decline reported in our farming division, mainly in crops, driven by the effects of an unprecedented drought in Argentina, in addition to higher costs.
Speaker 4: Let's move ahead to slide 7 with our operational performance. In the first quarter of 2023, crushing volumes amounted to 1.5 million tons, that is 1.2 million tons higher year over year. This was mostly due to increased costs in wiring and voltageness, especially while the
Speaker 4: driven by greater cane availability, which enabled us to resume our continuous harvest model and supply the market during Brazil's inter-harvest period. Agriculture productivity indicators, such as yields, presented a year-over-year improvement from 44 tons per hectare to 73 tons per hectare in the quarter, whereas TDRS content
Speaker 4: increase from 100 kilograms per tonne to 111 kilograms per tonne.
Speaker 4: During the first three months of the year, on average, sugar traded at 20.8 cents per pound, offering a premium of 8% to anhydrous ethanol and of 19% to hydrous ethanol in Mataroso-Duzul, which traded at 15.3 cents per pound and 17% to hydrous ethanol.
Speaker 4: taking advantage of the high degree of flexibility of our mills. Within our ethanol production, 71% was anhydrous. And to further profit from the premium that this ethanol commanded, we dehydrated over 30,000 cubic meters of hydro-ethanol stored in our tanks.
Speaker 4: Let's please turn to slide 8, where we would like to describe our sales throughout the quarter. Net sales amounted to $95 million, making a 39% increase compared to the same period of last year. This was driven by an increase in sugar sales on higher production, which fully offset the year-over-year reduction in ethanol sales.
Speaker 4: As you can see on the left chart above, selling volumes of sugar amounted to 106,000 tons as our mixed decision favored sugar production to capture the price premium over ethanol. It is worth highlighting that 94% of our sugar sales were VHP sugar.
Speaker 4: which presented a 9% increase in its selling price, reaching 20.2 cents per pound. In the case of ethanol, we reduced our volume sold of hydro-ethanol due to the year-over-year reduction in its selling price and built inventories which can be further dehydrated. On the other hand, volumes of anhydrous ethanol increased by 3%
Speaker 4: were exported at an average price of 20.3 cents per pound of sugar equivalent. Average selling price of energy increased by 68% compared to the prior year explained by our long-term energy contracts. Even though selling volumes were down 10% due to our decision to use part of our bagasse.
Speaker 4: as fuel to dehydrate ethanol instead of producing at low prices. Regarding carbon credits, we sold 146,000 cevallos, 9% higher than previous year, at an average price of $16 per cevallos. Please go to page 9.
Speaker 4: where we would like to present the financial performance of the sugar, ethanol and energy business. Adjusted of ETA during the quarter was $77 million, 34% higher year over year. This was explained by an increase in sales and by a $11 million year over year increase.
Speaker 4: in the mark to market of our harvested cane on higher crushing volume. Results were partially offset by higher costs due to the increase in production, coupled with higher costs of inputs as well as rates. It is worth mentioning that costs on a per-pound basis reported a decrease due to higher volume crush.
Speaker 4: Finally, to conclude with the sugar, ethanol, and energy business, please turn to slide 10 where we will briefly talk about the current outlook for the rest of the year.
Speaker 4: Assuming weather going normal, we expect our crashing volume in 2023 to be around 15% higher than in 2022, as we have enough sugarcane availability to utilize our industrial capacity.
Speaker 4: This, in turn, will result in a reduction in unitary cost due to better dilution of fixed costs.
Speaker 4: From a commercial point of view, Sugar has registered an increase in prices throughout the year and 2023 contracts are now trading, on average, above 25 cents per pound. We are in an excellent position to profit from this scenario as we have low commitments as shown in the table below.
Speaker 4: 6,000 tons of sugar carried over into the second quarter to be sold at market prices. In addition, our asset flexibility allows us to achieve an annual production mix of 50% sugar above Brazil's flexibility. Furthermore, there have been positive developments for ethanol as well.
Speaker 4: On March 1, 2023, the Brazilian government announced the return of federal tax, Pisco Fin's on gasoline and ethanol after being zeroed since mid-2022. Finally, the National Council for Finance Policy introduced changes in the collection of ICMES for gasoline.
Speaker 4: set to take place on June 1, 2023. Consequently, the outlook of eisanal also remains constructive for the short term. Now we would like to move on to the farming business. Please go to slide 12.
Speaker 4: Planting activities for the 2022-23 campaign reach a total of 268,000 hectares, making a 6% decrease compared to the previous campaign. We are currently undergoing harvesting activities for most of our grains. As of the end of April , we harvested 51% of the total grain.
Speaker 4: Although we are diversified in terms of products and geography, crop development was negatively impacted.
Speaker 4: Precipitations received in the last few weeks will enable yields to remain at current levels, reducing the downturn risk. However, we expect yields for our 22-23 crops campaign to be between 30-40% lower compared to historical levels. Looking forward, there is a strong likelihood of weather shifting to El Nino in the second semester of 2021.
Speaker 4: in the last quarter of 2023. On the following page 13,
Speaker 4: We would like to present the financial performance of our farming and land transformation businesses.
Speaker 4: adjusted the VBA total $19 million making a 48% reduction year over year. As expected, our crops business had a poor performance as a consequence of the drought. However, this was offset by the improved performance of our rice business driven by higher selling volumes.
Speaker 4: On the other hand, the dairy business presented results in line with last year's. In our crop business, adjusted to the VDA, I'm owed it to $196,000.
Speaker 4: As previously explained, results were mainly impacted by the reduction in yields, coupled with a genuinely increasing cost in US dollar terms and a reduction in planting area versus the previous season.
Speaker 4: adjusted the VDA in our rice business was $13 million, presenting a 54% increase compared to the previous year.
Speaker 4: Higher results were explained by an increase in both volume and average prices due to a better mix of higher value added products among other drivers.
Speaker 4: However, results were partially offset by a year-over-year reduction in yields caused by the impact of La Lina in some of our rice farms and higher costs in US dollar towns.
Speaker 4: Moving on to the dairy business, adjusted EBITDA totaled $6 million in line with last year. Results were explained by high average selling prices.
Speaker 4: and we increase the mix of higher value-added products coupled with our continuous focus on achieving efficiencies in our vertically integrated operations.
Speaker 4: Again, results were offset by higher costs, including costs of feed of our dairy cows on account of La Niña. In the case of land transformation, although no farm sales were concluded, results reflect the mark-to-market of an account receivable corresponding to the latest sale of farms in Brazil, which tracks the evolution of soybean prices.
Speaker 4: We are committed to a minimum distribution of 40% of the cash generated during the previous year via a combination of cash dividends and share per repurchase.
Speaker 4: In terms of dividends, a dividend distribution of $35 million was approved during our annual shareholder meeting held on April 19. The first installment of $17.5 million will be paid on May 24, whereas the second installment shall be payable in November in an equal cash amount.
Speaker 4: In addition, during 2023, we have already repurchased $9 million in shares, which represents approximately 1% of the company's equity. Moving on to the deposition, our net debt increased 5% compared to the same period of last year amounted to $830 million.
Speaker 4: This was mainly explained by the financing of an additional 17 million dollars in inventories of finished goods, as well as the financing of our growth gapx.
Speaker 4: As of March 31, 2023, our liquidity ratio reached 1.2 times, showing the company's full capacity to repay short-term debt with its cash balances, whereas our net leverage ratio was 1.9 times in line with the previous year.
Speaker 4: To conclude, 26% of total capex invested throughout the quarter was destined to expansion projects.
Speaker 4: investments on this front were mostly related to continue increasing our sugar camp temptation as well as other small project
Speaker 4: such as the acquisition of a generator and a turbo reducer in Angelic.
Speaker 4: which will enable us to generate more energy and the development of our bio-methan production out of Ineas.
Speaker 4: In our farming division, we are constructing our second biodigester in our dairy business.
Speaker 4: which will be using common year as an input to generate renewable energy project that is aligned with our sustainability commitment. It is worth mentioning that we are currently revising every uncommitted capital expenditure for our farm and business given the impacts of the drought in our response.
Speaker 2: Thank you very much for your time. We are now open to questions. Thank you. The floor is now open for questions. If you have a question, please write it down on the Q&A section or click on the raise hand for all your questions.
Speaker 2: Please remember that your company name should be visible for a question to be taken. We do ask that when you pose your question that you pick up your handset to provide optimal sound quality. Please hold while we pull for questions.
Speaker 2: Our first question comes from Isabella Simonato from Bank of America.
Speaker 2: Please, Mrs. Isabella, your microphone is open. Hi, good afternoon, Mariano, Emilio. Thank you for the question. I have two, actually. So first, I'm going to go ahead and turn it over to the audience.
Speaker 5: on the street actually both of them are on sugarcane first of all you mentioned on the release the intention to Increase crushing this year by 15% right, but you you come off a very good start
Speaker 5: of the season. I was wondering how do you see this number right if there's a potential of upside?
Speaker 5: to crushing volumes and therefore further cost dilution throughout the year. And my second question, you remain pretty unhedged for this season and next one, and sugar prices have been rallying. So I wonder
Speaker 5: you are able first of all to sell sugar at these levels right in the short term and second your medium-term view considering a potential impact of El Nino in Indian production how you're seeing
Speaker 3: sugar global demand and supply and potential views on pricing. Thank you. Thank you Isabella for your question. Very good question. I will ask Renato
Speaker 6: the answers of both questions that we can explain clearly. Hi Isabella, regarding the sugarcane question, the sugarcane outlook looks very good at this moment. We had a very good summer in terms of weather, a lot of good rains.
Speaker 6: and hot weather which is the ideal weather for the development of the sugar gain. So we're expecting yields higher than we had in the last two years. I think this is the main reason we have crushed 1.5 million tons in the first quarter.
Speaker 6: I think we were one of the few players crushing sugarcane during this period. So considering this scenario, the sugarcane is no longer a limiting factor. So we have plenty of sugarcane to have a full year of crushing.
Speaker 6: Of course, we depend a lot on weather to estimate the crushing from now on, but we are optimistic that we are going to increase our crushing in about 15%.
Speaker 6: And considering the second question about the sugar, I think we are very positive with the sugar scenario. Actually, the S&D situation has improved very quickly. Back in October , most analysts were projecting a surplus of 4 million tons of sugar. Today, many ads in the dental facility have been back.
Speaker 6: almost the consensus is a 3 million dasti. I think the reason for this change were some problems in some key countries like India, Thailand and European Union. So at this moment the market is very dependent on Brazilian sugar production.
Speaker 6: So everybody is expecting that Brazil is going to produce 38 million tons of sugar, which is challenging, but it's possible. I think we have already done once.
Speaker 6: I think if I'm not mistaken 2020 and we think that this cycle of high prices will last longer because we are not seeing any reaction from any other country. Brazil has a limited crystallization capacity so in order to increase sugar out of Brazil
Speaker 6: has to be invested, the mules have to invest in new sugar kitchens and it takes approximately a year and with the market inverted as we are seeing now, we are not seeing any additional capacity installed.
Speaker 6: Also, there are the other crops that compete with sugarcane in Brazil and even in other countries like Thailand, they are having a lot of competition with other crops in Brazil, the grains and in Thailand, cassava.
Speaker 6: That's the reason that we are so optimistic about sugar and we are not very advanced in our hedge position. As it was mentioned we have a ratchet only 50% of our production, mainly the sugar that we have already produced and sold. So we haven't sold anything that is
Speaker 6: is supposed to be to be delivering in the future. And we haven't sold anything for next crop yet.
Speaker 3: Thank you Renato. Isabel on the first question, a quick clarification, the 15% increase is an increase to the previous year, not to our current estimates.
Speaker 7: Thank you.
Speaker 2: That is clear, thank you. Our next question comes from Rodrigo Maida from Santander.
Speaker 2: Please Mr. Rodrigo, your microphone is open.
Hi Mariano, I'm here on the call. I have a few questions here. So my first question maybe goes to Mariano and it's regarding the strategic side of the company and capital location. Actually, I've divided this question into two parts. So we've always seen other partners of the farming company, right?
which is indeed in the company's DNA being the lowest cost producer and we've been very familiar with this strategy. But my question to you is
You've clearly proven yourselves on the industrial side of things. You've been doing a great job on the industrial side. You've been advancing on the bio-digestics here as well. So my question goes along the lines here of whether you could eventually invest more on the downstream side of things. Maybe perhaps, I'm thinking very out loud here, maybe perhaps on Spybean Crush.
maybe land and these costs are high, but I wanted to get your view here on whether you could be thinking of expanding into other cultures in Brazil. That would be nice to hear from you. And then I have a few other questions here on the sugar national side.
and anything on that front would be helpful for us. And didn't steal through the net and all. And actually, it's a broader question, maybe a question here, on the bio-dergiation, bio-mitting production. I understand you're doing that first to replace the digital consumption, right?
But then we're seeing some even future students who are investing more in the transportation side for the biometaine. So perhaps you could explain to us what's your take on selling the biometaine to others. It would be nice to understand as well. Thank you.
Okay. Very good questions and relevant questions. Sir Rodrigo, thank you for that. Number one, regarding this capital allocation and overall strategy.
I would say that we have these four lines of businesses that we've been always talking, that they all include farming, but they all include a circular, a sustainable production system that includes all these circular systems. So within the four business types that we have.
All this is included and this is very important to take into account our ESG Approach to each one of these and each one has its own Strategic move and as you've been hearing as you can say we can discuss largely and
spend more time of the business plan of each one of these projects. On the Shuman Ezanol, as you've been hearing, we have this organic growth, but on top of this and more relevant, we have all these different technologies that we are developing and all these increases in productivity and efficiencies that we are making every day on our day to day.
are under the production of the feed, we are under the production of the raw milk, and then we have this processing of the milk going to different products. And the reusing of all the manure of the cows into bio fertilizers and into the biological johnson field of shot NatureCRIPTION.com.
since the seed and we are developing the seeds until the final client. Today, we are showing much better prices on rice and that's not simply because the price of rice has gone up. This is mainly because we have developed the specific varieties that each one of our 100 and something clients that we have.
all over the world that is looking for the right variety that is what we are producing specifically for them. So all this development is going through in each one of these four business times and we've been spending a lot of focus on this and a lot of time on this concept of capital location.
That's why since two years ago we have developed this distribution policy that includes that 40% of the cash, of the net cash that is being generated to distribute within shareholders through buyback and dividend. The other 60%
is being applied for the growth of all these synergetic projects that makes us more efficient as we continue road. So that's basically a quick answer on the general question on capital that you asked first. Then going to your second question that is the
This is a policy on the government view on the price of gasoline. I will ask Renato to go through that quickly. Regarding the question about the increase in the planes rates.
We think that is technically feasible to do that, considering that almost 90% of the Brazilian fleet is as this flex.
and it would create an additional demand for 1 billion liters of anhydrous ethanol, which is about 10% of the anhydrous production, which would be very good. But we think that the discussions are still in the initial
in the beginning. So we don't know when it's going to be implemented. We are following the discussions in the news through Hunika and the media. Regarding the biogas question that...
the bimethane molecule at our mill. So what we are doing now, we are doing always the arbitrage between the two possibilities to choose what's the best way to do it. So we start with this replacement, but we are also analyzing the possibility of selling it to third parties.
Thank you so much guys, have a good afternoon.
Thank you so much guys, have a good afternoon. Thank you.
Just as a reminder, if you wish to ask a question, please write it down on the Q&A button or press the raise hand button for audio questions.
Wait, while we pull for questions.
Our next question comes from Lucas Ferreira from JP Morgan. Please Mr. Lucas, your microphone is open.
Hi guys, good afternoon. Two questions for me. One is a question on your production costs for both main businesses, say farming and sugar and ethanol. In the sugar and ethanol, what do you expect your cash cogs per tier to evolve this season considering the impact
it's going to give you some opportunity there to lower costs.
And the second question is just a follow-up on the hedge. What prevents you go even deeper there in the hedge curve now? So if it's something you're considering or just because your policy you're still waiting for the crop to come so what prevents you to go above that 2% for next season but above the 50% for also this season given the
the strong prices and I would imagine very strong margins that you get with this 26 cents per pound spot price. Thank you. Hi Lucas, thank you very much for your question. Regarding the production costs on the farming business, what you are seeing now are the production costs that have increased.
of the campaign 2223. That campaign 2223 had higher fertilizer prices and that's probably the herbicide prices also. And that's what you are seeing now. For the following season that is what we will be starting to plant in July of this year.
that's to go through the cost of production and again as the cost is a fixed cost per hectare is affected by the yield and so the yield the very bad yield of this year on the production of the different crops.
is also affecting the cost that with El Nino forecasted for next year. We are not expecting that. So that for next season we do expect a decrease in the in the cost of the overall farming business. Then going into the cost of the sugar national.
the freight situation, the competition to grains in Brazil. But I think the most important factor is that the yield and volume are increasing. So it's going to have a higher dilution in our total cost. So we expect our costs decrease.
between 5 and 10 percent compared to the cost that we had last year.
Moving to your other question about the hedge, as I mentioned before, we are very optimistic about the fundamentals of the business for the next, I would say, the short term and short mid-term. We are very optimistic about the fundamentals of the business for the next, I would say,
So we think that the future price has to be in line with the current price. So the curve that today is inverted has to be more flat. And we think that is going to happen sometime in the future. And then we will have more opportunity to fix our price at the higher level.
We think that the future price has to be in line with the current price so that the curve that today is inverted has to be more flat and we think that is going to happen sometime in the future and then we will have more opportunity to fix our price at a higher level. Super clear. Thank you very much.
Thank you, Lucas. This concludes the question and answer section. At this time, I would like to turn the floor back to Mr. Bush for any closing remarks. Please, Mr. Bush, you may proceed.
Thank you all for joining the call and hope to see you in our upcoming meetings.
Thank you. This does conclude today's presentation. You may now disconnect at this time and have a wonderful day.