Adecoagro S.A.

Good afternoon, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to ADECO Agro's first quarter 2023 results conference call. Today with us, we have Mr. Mariano Bosch, CEO, Mr. Emilio Ñeco, CFO, Mr. Renato Junqueira Pereira, Sugar, Ethanol and Energy VP, and Mrs. Victoria Cabello, Investor Relations Officer. 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 remarks are completed, there will be a question and answer section. At that time, further instructions will be given. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Adequago Management and on the 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. Investors should understand that general economic conditions, industry conditions and other operating factors could affect the future results of ADECO Agro and could cause 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 ADECO Agros 2023 First Quarters Research Conference. Before going into the results of our operations, a brief update on distributions. Last month, our annual shareholder meeting approved a total cash dividend of $35 million to be paid during 2023. This part of our distribution policy represents approximately $0.32 per share, equivalent to 4% dividend yield. Those dividends will be distributed in two equal installments of 17.5 million each in May, this May, and November. In addition to this, we continue buying shares under our buyback program, and this year we have already repurchased 1.1 million shares, equal to 1% of the company's equity. To comply with our distribution policy, During the rest of the year, we must repurchase at least an additional $13 million in shares. Now, let's go into the highlights of our operations. 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. Talking about diversification, we have four different segments, crops, rice and dairy in Argentina and Uruguay, that suffer drought in different manners, from a huge impact in crops to almost none in rice and dairy. 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. We are in the middle of the harvesting activities and we expect to have 30 to 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 Niño, which means good rains. In the rice business, we completed harvesting activities with only 6% reduction in yields. but better prices and logistics so we had better margins. We expect to continue to benefit from this. In the daily business, we continue in line with the previous year with some increase in productivity offset by higher costs of feed. In Brazil, adjusting the VDA for our sugar, ethanol and energy business increased by 34% year over year. Cane availability was excellent and productivity indicators almost doubled compared to last year. Because of this, we crushed five times more cane and we are one of the few players to produce sugar during the traditional inter-harvest period. The outlook for this segment looks very promising and price scenario is very constructive. For instance, sugar prices have increased by 30% since the beginning of the year and are now trading above 25 cents per pound. This represents 30% premiums to hydrosethanol and over 15% to anhydrous ethanol. Fundamentals are supportive to sugar prices going forward and we are uniquely positioned to profit from this as we have more than 50% of our sugar still unhedged. Another development we are very excited about involves the production of renewable energy from vignasse. After more than 10 years developing the technology to produce biogas, we have reached the stability in production and its conversion into biomethane. We recently became the first player to run its vehicles on biomethane fully produced from vignasse, effectively replacing diesel consumption. We are building a second biodigester which will double our biomethane production, resulting in additional cost savings and the improvement of our carbon footprint. Fully scaled up, this project has the potential to replace our whole diesel 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 and is a clear example of the innovative approach we implemented in our different business units. 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 continue to generate good returns and value for our shareholders. Now, I will let Emilio walk you through the numbers of the quarter.

Thank you, Mariano. Good morning, everyone. Let's start on page four with a summary of our consolidated financial results for the quarter. 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 revenues on account of higher selling prices due to a better mix of higher-value added products as well as to higher volumes sold. Please turn to slide 5 for a broader view of our consolidated financial figures. As you can see on the right chart above, adjusted EBITDA totaled $89 million, 3% higher than the previous year. 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. 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. Let's move ahead to slide seven 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 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 TRS content increased from 100 kilograms per ton to 111 kilograms per ton. 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 Mato Grosso do Sul, which traded at 19.3 cents per pound and 17.5 cents per pound sugar equivalent, respectively. Consequently, we divided as much as 46% of our TRS to sugar production in line with our strategy to maximize production of the product with the highest marginal contribution, 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 hydrous ethanol stored in our tanks. Let's please turn to slide eight, 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. 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, 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 hydrous ethanol due to the year-over-year reduction in its selling price. and build inventories which can be further dehydrated. On the other hand, volumes of anhydrous ethanol increased by 3% compared to the previous year, given our flexibility to export to Europe and to sell at the local market depending on market opportunities. This is so since we have the necessary certifications and industry capacity to meet product specifications. Within the volume sold, 7,000 cubic meters 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 as fuel to dehydrate ethanol instead of producing at low prices. Regarding carbon credits, we sold 146,000 ceballos, 9% higher than previous year, at an average price of $16 per ceballo. Please go to page 9, where we would like to present the financial performance of the sugar, ethanol, and energy business. Adjusted EBITDA 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 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 freights. It is worth mentioning that costs on a per-pound basis reported a decrease due to higher volume crush. Finally, to conclude with the sugar, ethanol, and energy business, please turn to slide 10, where we would like to briefly talk about the current outlook for the rest of the year. Assuming weather going normal, we expect our crushing volume in 2023 to be around 15% higher than in 2022, as we have enough sugarcane availability to utilize our industrial capacity. This, in turn, will result in a reduction in unitary cost due to better dilution of fixed costs. 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, and over 46,000 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. On March 1st, 2023, the Brazilian government announced the return of federal tax on gasoline and ethanol after being zeroed since mid-2022. Finally, the National Council for Finance Policy introduced changes in the collection of ICMS for gasoline set to take place on June 1st, 2023. Consequently, the outlook of ethanol also remains constructive for the short term. Now, we would like to move on to the farming business. Please go to slide 12. Planting activities for the 2022-23 campaign reached 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 area and produced over 500,000 tons of agriculture produce. In this regard, we cannot help to mention that the below-average precipitations that we mentioned during our previous report continued throughout the stage of yield definition of all our crops. Although we are diversified in terms of products and geography, crop development was negatively impacted. 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 to 40% lower compared to historical levels. Looking forward, there is a strong likelihood of weather shifting to El Niño in the second semester of 2023. This should allow for an improvement in soil moisture and recovery of water levels in the reservoirs, favoring the outlook for the 2023-2024 harvest season. As Mariano mentioned, we will begin planting activities for our winter crops in July this year, whose results are reflected in the last quarter of 2023. On the following page 13, We would like to present the financial performance of our farming and land transformation businesses. Adjusted EVPA 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. On the other hand, The dairy business presented results in line with last year's. In our crop business, adjusted EBITDA amounted to $196,000. As previously explained, results were mainly impacted by the reduction in yields coupled with a genuine increase in cost in U.S. dollar terms and a reduction in planted area versus the previous season. Adjusted VDA in our rice business was $13 million, presenting a 54% increase compared to the previous year. 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. However, results were partially offset by a year-over-year reduction in yields caused by the impact of La Línea in some of our rice farms and higher costs in U.S. dollar terms. Moving on to the dairy business, adjusted EBITDA totaled $6 million in line with last year. Results were explained by higher average selling prices and we increased the mix of higher value-added products, coupled with our continuous focus on achieving efficiencies in our vertically integrated operations. Again, results were offset by higher costs, including cost of feed of our dairy cows on account of La Línea. 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. Let's now turn to page 15, where we would like to present our capital allocation strategy. In 2022, we generated $141 million of net cash from operations. As Mariano mentioned earlier, 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 per repurchase. In terms of dividends, a dividend distribution of $35 million was approved during our annual shareholder meeting held on April 19th. The first installment of $17.5 million will be paid on May 24th, whereas the second installment shall be payable in November in an equal cash amount. 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 debt position, our net debt increased 5% compared to the same period of last year, amounting to $830 million. This was mainly explained by the financing of an additional $17 million in inventories of finished goods, as well as the financing of our growth capex. As of March 31st, 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. To conclude, 26% of total CapEx invested throughout the quarter was destined to expansion projects. Investments on this front were mostly related to continue increasing our sugar cane plantation, as well as other small projects, such as the acquisition of a generator and a tuber reducer in Argelic, which will enable us to generate more energy, and the development of our biomethane production out of Viñas. In our farming division, we are constructing our second biodigester in our dairy business, which will be using cow manure as an input to generate renewable energy, a project that is aligned with our sustainability commitment. It is worth mentioning that we are currently revising every uncommitted capital expenditure for our farming business, given the impacts of the drought in our results. 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 raised hand for audio questions. 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 optimum sound quality. Please hold while you pull for questions. Our first question comes from Isabella Simonato from Bank of America. Please, Mrs. Isabella, your microphone is open.

Hi, good afternoon, Mariano and Emilio. Thank you for the question. I have two, actually. So first, 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 come off a very good start of the season. I was wondering how do you see this number, right? If there's a potential of upside to crushing volumes and therefore further cost dilution throughout the year. And my second question is, you remain pretty unhedged, right, for this season and next one. And sugar prices have been rallying. So I wonder if you are able, first of all, to sell sugar at these levels, right, in the short term. And second,

uh your medium-term view considering a potential impact of el nino in indian production how you're seeing uh sugar sugar global demand and supply and potential views on on pricing thank you thank you isabella for your question um very good question i will ask renato shunkeira to to go through the the answers of both questions that we can explain clearly.

So 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 and hot weather, which is the ideal weather for the development of the sugarcane. 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. 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. 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%. And considering the second question about the sugar, I think we are very positive with the sugar scenario. Actually, the S&D situation has has improved very quickly. Back in October, most analysts were projecting a surplus of 4 million tons of sugar. Today, almost the consensus is a 3 million . 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. So everybody's 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. 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, it has to be invested. The mills have to invest in new sugar kitchens. And it takes... uh, approximately a year and, and with the market inverted, as we are seeing now, we are not seeing any additional capacity being stalled. Uh, uh, also there are the other crops that compete with sugarcane in Brazil. And even if we in other, uh, uh, countries like, like talent, like Thailand, they're having a lot of competition. with other crops, in Brazil, grains, and in Thailand, cassava. 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 budget only 50% of our production, mainly the sugar that we have already produced and sold. So we haven't sold anything that is is supposed to be a delivery in the future, and you haven't sold anything for next crop yet.

Thank you, Renato. Isabella, on the first question, a quick clarification, the 15% increase is an increase to the previous year, not to our current estimate.

That is clear. Thank you.

Our next question comes from Rodrigo Almeida from Santander. Please, Mr. Rodrigo, your microphone's open.

Hi, Mariano, Emilio, everyone 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 allocation. Actually, I'll divide this question in two parts. So I mean, we've always seen Adepago as a 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 biodigesters here as well. So my question goes along the lines here of whether you could eventually invest more, say, on the downstream side of things. Maybe perhaps, I'm thinking very out loud here, maybe perhaps on soybean crushing, I don't know, anything that's related more to the downstream side of things. So that's the first part of this first question. The second part of the question is on capital allocation still, but still on the farming side. So perhaps if you could explain to us here, what's your point of view on perhaps expanding into other cultures inside Brazil? Maybe land and these costs are high, but I wanted to get your view here on 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 Strugan National side. I think I wanted to get your view first on the government's policy to increase the ethanol blend in gasoline. If you have any opinion on that, if it's feasible or not, how long could you take to reach the 30%? Anything on that front would be helpful for us. and then still on frugal and ethanol. And actually, it's a broader question, maybe a discussion here on the biodigestion, biomethane production. I understand you're doing that first to... to replace the diesel consumption right uh but then we're seeing some even few distributors investing more in the in the transportation side for biomethane so perhaps you could explain to us what's your take on on selling this biomethane uh to others uh would be nice uh to understand as well thank you okay um

Very good questions and relevant questions, Rodrigo. Thank you for that. Number one, regarding this capital allocation and our 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 lines 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 sugar and ethanol, 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 job and I think this has always been the focus. It is not just agricultural part. It's the integrated part. So all this solution is what is relevant when we're talking about this segment. Same thing goes for the dairy business. When we think in the dairy business, we 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 biofertilizers and into the biodigestor that generates this biogas. So the biogas is not only generated through the vineyards, but also in the manure of the cows. So you can see this same concept of the circular economy. Same thing is what you see in the RISE project. In the RISE project, you see 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 hundred 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 lines. And we've been spending a lot of focus on this and a lot of time on this concept of capital allocation. 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. And the other 60% is being applied for the growth of all these synergetic projects that makes us more efficient as we continue growing. So that's basically a quick answer on the general question on capital allocation that you asked first. Then going to your second question, that is the this policies and governmental view or our view on the price of gasoline. I will ask Renato to go through that quickly.

Yes, regarding the question about the increase in the blend rate, we think that is technically feasible to do that. considering that almost 90% of the Brazilian fleet is flex. And it would create an additional demand for 1 billion liters of anhydrous ethanol, which is about 10% of the anhydrous production, would be very, very good. But we think that the discussions are still in the initial, is still in the beginning. So We don't know when it's going to be implemented. We are following the discussions in the news through UNICA and the media. Regarding the biogas question that you asked, today we stabilize our production of biogas and we start to produce biomethane and we start to replace the diesel of our fleet But we also have a lot of demand to sell the biomethane 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.

Have a good afternoon. Thank you, Rodrigo. Our next question comes from Lucas Ferreira from JP Morgan. Please, Mr. Lucas, the microphone's 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, let's say, cash cogs per TRS to evolve in this season, considering your very high expectation of increasing crushing? And I believe some other lines like diesel also declining and maybe some others. And in the case of farming, especially in crops, how you see... your fertilizer bill next season. If it's gonna give you some opportunity there to lower costs. And the second question is just maybe 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 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 22-23. That campaign 22-23 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, the fertilizer prices have reduced by 20 to 30%, more on the nitrogen fertilizers and less on the phosphate fertilizers. And herbicides in general has also gone down in dollar prices. So that's to go through the cost of production. And again, 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 Niño forecasted for next year, we are not expecting that. So that for next season, we do expect a decrease in the costs of the overall farming business. Then going into the cost of the sugar and ethanol, Renato will explain in more detail.

In the sugar and ethanol, there are some cost components that are decreasing, such as fertilizer and diesel. Others are increasing. I think the major one is freight, which has increased because of the 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 costs. So we expect our costs decrease between five and 10% compared to the cost that we had last year. And moving to your other question about the hedge, As I mentioned before, we're very optimistic about the fundamentals of the business for the next, I would say, in the short term and short midterm. 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 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. Bosch for any closing remarks. Please, Mr. Bosch, 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.