Adecoagro S.A. (NYSE:AGRO) Q4 2023 Earnings Call Transcript

Adecoagro S.A. (NYSE:AGRO) Q4 2023 Earnings Call Transcript March 15, 2024

Adecoagro S.A. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro’s Fourth Quarter 2023 Results Conference Call. Today with us, we have Mr. Mariano Bosch, CEO; Mr. Emilio Gnecco, CFO; Mr. Renato Junqueira Pereira, Sugar, Ethanol and Energy VP; and Mrs. Vitoria Cabello, Investor Relations Officer. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the company’s presentation. After the company’s remarks are completed, there will be a question-and-answer session. At this time, further instructions will be given. 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.

Mariano Bosch: Good morning and thank you for joining Adecoagro’s 2023 fourth quarter results conference. We are presenting all-time records in gross sales, adjusted EBITDA and net cash from operations. Despite having experienced the worst drought in Argentina’s history, these accomplishments were possible because of the investment made through the years to grow our production capability, strengthen our asset base and teams, the synergies achieved across all our businesses, our continuous focus on efficiency and being the low-cost producer, our geographic and product diversification, our flexibility to shift across markets and products. These results made us reduce our net debt by more than $150 million, while we continued investing in growth projects with attractive IRRs and also distributing to shareholders via dividends and buybacks.

Based on the results presented and according to our distribution policy, this year we will distribute at least $70 million, a new record for the company. Some brief comments on ESG. As food and renewable energy producers, taking care of the natural resources and the environment is in our DNA. Throughout the years, we have developed sustainable production models in each of the places where we operate. We expect to achieve our newly disclosed 2030 decarbonization targets by reinforcing these models and investing in new technologies with attractive financial returns, like the biomethane. In Brazil, our Angelica mill facility received the CORSIA certification which guarantees that our ethanol can be used for Sustainable Aviation Fuel production, a potential new market for our ethanol production.

In our Dairy segment, our second biodigester is injecting renewable electricity to the local grid by using cow manure as an input. This is a clear example of how circular economy model works. From this manure, we also produce biofertilizer which is then used in our crop farms and later produce cow feed. The ESG awards received during the year are another proof of the work and communication of our best practices. Now looking ahead, we are very enthusiastic about the outlook of all our operating segments. Normal weather conditions in Argentina and Uruguay have favored the planting and development of over 270,000 hectares of grains and rice. In the case of crops, yields are being defined and we feel confident that production will go back to normal levels, consequently showing a significant recovery in adjusted EBITDA in 2024.

Furthermore, our rice mills in Argentina and Uruguay are continuously processing and turning our rice production into higher value-added products for our clients distributed all over the world. Having in place a fully integrated business model enables us to offer high quality rice at attractive prices. In the meanwhile, in Brazil, we are crushing cane and producing sugar thanks to our continuous harvest model and we foresee to continue increasing our milling compared to the 2023 record crushing, assuming weather evolving normally. To conclude, I want to thank our teams for the hard work and effort. Although we had a difficult start to the year, we achieved these results and the output remains very positive. Thank you to our shareholders for your continuous support.

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

Emilio Gnecco: Thank you, Mariano. Good morning, everyone. Let’s start on Page 4 with a summary of our consolidated financial results. Gross sales totaled $400 million during the fourth quarter, 5% higher year-over-year while adjusted EBITDA reached $96 million, 9% down versus the same period of last year. On an annual basis, gross sales amounted to $1.4 billion and adjusted EBITDA was $477 million making a 7% and 10% increase, respectively, versus the prior year as well as all-time records for the company. These results were mostly explained by an outperformance of the sugar, ethanol and energy business on greater cane productivity which enabled us to increase our sugar production and execute sales at solid prices. Results were also positively impacted by solid returns from our rice segment on higher average selling prices and the sale of a farm in September.

This in turn fully offset the decline reported in the crops production explained by the effects of an unprecedented drought event and higher costs in dollars. Now please turn to Slide 5. As you can see on the upper right chart, we generated $176 million of net cash from operations in 2023, 24% higher than the prior year. The increase in cash generation was driven by an outstanding operational performance. Investments carried out throughout the past years across all our operations, along with an action plan which aimed to reduce expenses and generate savings, among other initiatives, have paid off. Regarding our production figures in the bottom right chart, we can see that crushing volumes in our sugar, ethanol and energy business were up 19% versus 2022.

Higher crushing translates into higher production volume, increasing sales and diluting costs. This was mostly possible thanks to the implementation of innovative agriculture techniques such as pre-sprouted seedling which enabled us to reproduce sugar cane varieties that have better growth development in our region both in yields and TRS content. On the other hand, total production in our farming division reported a 29% year-over-year reduction fully explained by the reduction in yields and planted area in our crop segment because of La Niña weather event. Let’s move to Slide 7 with the operational performance of our sugar, ethanol and energy business. During the fourth quarter, crushing volume reached 2.9 million tons, 7% lower versus the prior year due to higher rainfall received compared to the same period of last year.

Regarding productivity, yields reached 82 tons per hectare whereas TRS content amounted to 127 kilograms per ton. In terms of mix, we diverted as much as 52% of our TRS to sugar in line with our strategy to maximize production of the product with the highest marginal contribution. Within our ethanol production, 72% was hydrous as demand for this type of ethanol had been significantly increasing and gaining market share offering the better margin. On a full year basis, crushing volume reached 12.5 million tons, 19% higher year-over-year and a record for our mills. This is mostly explained by a significant improvement in agricultural productivity indicators, including a 20% year-over-year increase in yields to 80 tons per hectare as well as to greater sugarcane availability.

As commented before, production mix stood at 52% sugar and 48% ethanol. This resulted in a sugar production of 806,000 tons in 2023, making a new record for our mills as well as a year-over-year increase of over 300,000 tons. As shown in the bottom right chart, while we maximize sugar production during the whole year to profit from the rally in global sugar prices last year, we maximized ethanol during the first semester and switched to sugar during the second half as ethanol prices decreased. This proves the high degree of flexibility of our mills. Let’s please turn to Slide 8 where we describe our sales conducted throughout the year. Net sales amounted to $229 million during the quarter and $700 million on a year-over-year basis making a 16% increase compared to the previous year in both cases.

This was driven by higher sugar sales on higher production and prices, which fully offset the overall reduction in ethanol sales. As you can see on the top left chart, selling volumes of sugar amounted to 796,000 tons during the full year as our mixed decision favored sugar production to capture the significant price premium over ethanol. Consequently, our average selling price increased 24% versus the prior year. In the case of ethanol, we made the commercial decision to reduce sales and build stocks as prices decreased anticipating high supply levels. Year-over-year sales comparison is only indicative since we ran a completely opposite strategy during 2022, maximizing ethanol production taking advantage of very attractive prices. That being said, during 2023, the export market opened the window of opportunity and we sold 54,000 cubic meters at an average price of $637 per cubic meter.

This is so since we have the necessary certifications and industry capacity to meet product specifications. On an accumulated basis, energy selling volumes increased 18% compared to the prior year but the average selling price decreased by 9% due to low energy spot prices. Regarding carbon credits we sold over 440,000 CBios during the year amounting to $8 million in sales. Despite representing an 8% year-over-year increase in the selling price the declining volume sold is explained by lower volumes of CBios issued on lower ethanol sales. On the following slide we explain our cash cost. Total cash cost reflects on a cash basis how much it costs to produce one pound of sugar and ethanol in sugar equivalent. On a per unit basis our cash cost amounted to $0.139 per pound of sugar equivalent, 6% higher than in the prior year.

This is mainly explained by first a 20% year-over-year increase in SG&A expenses on account of higher freight costs due to our commercial decision to produce more sugar and profit from higher relative prices. And second, maintenance CapEx was 5% higher than in 2022 due to the appreciation of the Brazilian Real as well as a higher renewal area and planting costs versus the prior year. However note that we were able to better dilute our production costs thanks to the year-over-year increase in milling volumes diminishing the increase in total cash cost. All of our efforts are devoted to further enhance efficiencies to continue reducing it. As we continue ramping up operations in our cluster cash cost will resume its downward trend. Please go to Page 10 where we would like to present the financial performance of the Sugar, Ethanol and Energy business.

Adjusted EBITDA amounted to $87 million during the fourth quarter, 14% lower than the same period of last year. Despite the increasing net sales and the gains reported in the mark-to-market of our commodity hedge position lower adjusted EBITDA generation was driven by a year-over-year loss in the mark-to-market of our biological assets. On a full year basis adjusted EBITDA reached $396 million presenting a 6% increase versus last year and a new record for this business unit mostly explained by the increasing net sales. Finally to conclude with the Sugar, Ethanol and Energy business, please turn to Slide 11 where we would like to briefly talk about the current outlook. We have entered 2024 with good sugarcane availability and we are currently one of the few players in Brazil crushing and producing sugar.

Being able to crush year-round even during the traditional inter-harvest period is one of our main competitive advantages. Assuming weather going normal we expect to increase our crushing volume versus 2023 as we have sufficient sugarcane availability to use our industrial capacity. This in turn will result in a reduction in unitary costs due to better dilution of fixed costs as mentioned before. From a commercial point of view sugar prices continue to be supported by strong fundamentals. We are in an excellent position to profit from this scenario as we have 53% of our expected 2024 sugar production still unhedged. In the case of ethanol parity at the pump currently stands at low 60%, pressured by greater inventory levels in Brazil even though demand has significantly switched to this type of fuel.

We believe ethanol prices have room to increase since less ethanol is expected to be produced during 2024-2025 harvest, explained by less cane being crushed in Brazil on account of drier weather and our players still maximizing sugar production given its attractive premium. Now we would like to move on to the farming business. Please go to Slide 13. For the new campaign that we are currently engaged in we have completed planting activities in 279,000 hectares with a favorable weather outlook. This represents a 5% increase in planted area compared to the previous campaign. In this regard we’d like to mention that weather in South America has shifted to El Nino after three consecutive years of dry weather. Rains registered throughout summertime allowed for an improvement in soil moisture and a recovery of water reservoirs in all of our productive regions.

As of today most of our crops are undergoing its yield definition phase so the evolution of weather during the upcoming weeks will be key. We expect a full recovery in our crops production in 2024 while for our rice segment we are forecasting better yields due to the full recovery in water reservoirs. On the following Page 14 we present the financial performance of our farming business. Adjusted EBITDA for the farming business totaled $14 million during the quarter making a 34% year-over-year increase while on an annual basis reached 103 million 25% higher than the previous year. Full year results increase was mainly explained by an outperformance from our rice division coupled with the sale of El Meridiano farm which in turn fully offset the weak performance of our crops and dairy segments.

Before going into the results of each operating segment I would like to comment that effective for our year ended 2023 we have modified our internal reporting to refine the way we view our farming business and its interaction with the land transformation and cattle activities embedded within such operations. Previously we reviewed the results of our land transformation strategy as a separate activity upon disposition of transformed farmlands and or other rural properties. As from the fourth quarter of 2023 we started allocating any profit from disposition of farmland or a bargain purchase gain as part of the farming activity where such farming belongs. Adjusted EBITDA for our crop segment amounted to a negative of $304,000 during the fourth quarter while on an annual basis reached $27 million.

The later figure reflects the sale of El Meridiano farm conducted in September 2023. We generated an adjusted EBITDA of $30 million previously booked in the land transformation segment. Crops production on a standalone basis that is before the sale of the farm concluded in a break even adjusted EBITDA for both the quarter and full year results as expected. Results were mainly impacted by the reduction in yields coupled with a genuine increase in cost in dollar terms. Adjusted EBITDA in our rice segment was $8 million during the fourth quarter and $48 million on an accumulated basis. The increase in both cases was driven by higher average selling prices due to a better mix of higher added value products and higher global prices which in turn fully offset the reduction in yields and the increasing costs in dollar terms.

Moving on to the dairy segment adjusted EBITDA totaled $6 million, 25% lower than the prior year while on a full year basis it stood at $28 million making a 9% year over year reduction. Lower crop output increased coin silage prices which is our main cow feed driving the year over year decline in our dairy segment. However, cow productivity reached record levels and we leveraged from our industrial flexibility to continue producing the product with the highest marginal contribution. Let’s now turn to Page 16 where we would like to present our capital allocation strategy. According to our distribution policy we are committed to a minimum distribution of 40% of the cash generated during the previous year via a combination of cash dividends and share repurchase.

Throughout 2023 we distributed $61 million or 43% of the net cash from operations generated in 2022. This was executed via cash dividends in the amount of $35 million coupled with a repurchase of $26 million in shares. In 2023 we generated $176 million of net cash from operations consequently our minimum distribution amounts to $70 million during 2024. Pending the approval of the annual general meeting cash dividends will amount of $35 million to be paid in two installments of $17.5 million each. Additionally here today we have already repurchased $18 million in shares which represents approximately 1.7% of the company’s stake. Please turn to Slide 17 for a broader view of our debt position. Net debt amounted to $503 million making a 26% decrease compared to the same period of last year and a 29% reduction quarter over quarter.

This was explained by a significant reduction in the gross debt position mainly in our farming business thanks to very good operational results and the company’s financial strategy carried out throughout the year that enabled us to take advantage of opportunities in Argentina’s financial market and benefit from the short depreciation of the Argentine peso. As shown in our financial figures, the reduction in our net debt position was done without distending [ph] our distribution policy and growth projects. As of December 31st 2023 our liquidity ratio reached 2.8 times showing the company’s full capacity to repay shortened debt with its cash balances whereas our net leverage ratio was 1.1 times, 0.5 times down compared to the previous year. On the following slide, we explain our CapEx projects.

27% of total investments consisted of expansion projects. In Brazil we continue increasing our sugarcane plantation and the expansion of our biomethane production to replace diesel consumption and explore other alternative uses. During 2023 we reviewed our CapEx investments in our farming business to generate savings in a year of adverse weather in Argentina. Our main CapEx program consisted of expanding our rice operations and finalizing the construction of our second biodigester in our dairy operation and the upgrade of our cheese factory line in Morteros facility. To conclude I would like to thank our team for the extraordinary results delivered as you know and Mariano also mentioned when we opened the call 2023 started as a very challenging year but we were able to turn around the odds and deliver strong results showing the company’s resilience against adverse conditions based on great productive assets diversification of products and regions and last but not least our people.

Thank you very much for your time. We’re now open to questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question comes from Isabella Simonato with Bank of America. You can activate your microphone.

Isabella Simonato: Thank you very much. Good morning, everyone. Thanks for the call. I have two questions. First of all on sugar and ethanol you mentioned in the press release right that you expect crushing to be up year-over-year. So I was wondering if you could give us a sense of what volume of cane crush this year we should be looking at, and if you could elaborate a little bit more on the mix between sugar and ethanol and also the export market of ethanol which you took advantage in 2023 and how do you see the outlook for that? And second on the crop business and that includes price you mentioned also about yield perspective for the season as if weather permitting right and next couple of weeks, but also when we think about the cost side, right? If you could give us some sort of outlook for north where cost per hectare is looking like for the upcoming season I think that would help us to understand the outlook for 2024? Thank you so much.

Mariano Bosch: Okay. Thanks, Isabella, for your question. To take the first part of the question, I will ask Renato to give more clarity on the sugar and ethanol segment and then I will take the crops and rice comment.

Renato Junqueira Pereira: Hi, Isabella. Thank you for your question. Regarding the sugarcane question as it was mentioned in the presentation in the last quarter of last year we have a very good range that’s one of the reasons that we crushed less cane compared to the year before, but we entered the first quarter in a very good condition which was very good considering our continuous harvest model so today we have already crushed in the first quarter more sugarcane than we crushed in the first quarter of last year so it’s a very good situation. In February and March the weather is being a little bit drier than normal so if we put all this in consideration we think that our yields are going to be similar to the ones that we had last year.

But we are still optimistic that we’re going to crush more cane than last year, because our area of sugarcane has increased. So we expect we’ll have potential to crush approximately 5% more than we crushed last year. So regarding the second part of the question is the mix of production. We are keep maximizing the production of sugar because it’s still paying much more than ethanol right now. Last year we have reached a mix of 52%.So we think this year we are going to achieve a mix similar to that maybe a little bit more due to small adjustments and focus on the sugar operation and I think it’s important to mention that we believe that the ethanol price is going to increase and the parity rate is going to reach 7% at some point of the year and if that happens the ethanol equivalent is around $0.20 per pound.

So this is this is like a floor that we have to change the mix. And regarding the export, I think we export a lot of ethanol to Europe in 2022, there was a very good opportunity. Last year we have exported approximately 50,000 cubic meters this year we haven’t exported any ethanol to Europe yet because we expect that the prices in Brazil is going to increase so we don’t have the export window open. Also the price of oil when we exported ethanol back in 2022 was very high which is not the case right now. But of course we have all the possibilities to export we have the Bonsucro certification we have all the equipments to produce the ethanol required by European market. So if that happens we will be getting this opportunity.

Mariano Bosch: Thank you, Renato. And Isabella, regarding the crops and rice that you were asking and you’re specifically asking about the rice. We are today in the middle of the harvest, so we are have already harvested 50% that is in a good shape and now we still need to harvest the other 50%. Thinking for next year the cost of production, so the cost of production of next year, we think that it’s going to be in line with the previous year. Because there are many different factors and within the factors that are improving costs are all our efficiencies that we’ve been working with the increase in the area and coming into Uruguay and all the acquisition that we are taking care of last year. So there is an improvement because of the efficiencies and then in dollar terms that is what how we think about it there are most of the costs that are going to be more competitive this year than what they were last year that is a biofertilizer fertilizers in general and then even talking about the cost of fuel or irrigation cost as a total.

Isabella Simonato: Thank you.

Operator: Next question from Thiago Duarte with BTG Pactual. You can activate your microphone.

Thiago Duarte: Hello, everybody. Thank you for the opportunity. I have two questions and I think focused on the sugar and ethanol and energy business. The first one is kind of a follow-up I think you made a comment in your prepared remarks with regards to the cash cost in this business we saw an increase in the cost per pound in Q4. I presume this was due to the lower amount of cane crushed and obviously the lower dilution and if I understood you’re still confident that you can see a downward trend in 2024 total relative to 2023.So just wanted to make sure these understandings are correct with regards to cost in Q4 and to unitary cost in 2024? That would be the first question. And the second question, when we when you look at the expansion CapEx, I think it was $52 million in 2023 and mostly focused on the built of the biodigester as well as the expansion of the planting so just wanted to know how much of that we should see moving on into 2024.