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.