Adecoagro S.A.

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to ADECO Agro's second quarter 2023 results conference call. Today with us, we have Mr. Mariano Bosch, CEO, Mr. Emilio Nheko, 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's 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 ADECO Agros 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.

Good morning and thank you for joining ADECO Agros 2023 second quarter results conference. As you may have seen in the report, we are presenting very good results despite the extreme drought that impacted some of our operations. Our adjusted EBITDA was 15% higher compared to last year. It is in times like this when we can clearly show and monetize the benefits of being diversified and focused on achieving efficiencies in our whole value chain. We are very excited about how our sugar, ethanol and energy business is performing. The development of our sugarcane plantation is really good and we expect to increase crushing volumes by 15% compared to 2022. We have a large flexibility to shift production and we are using it to maximize sugar production. We have about 25% of this year's sugar production and almost all of our next year's steel and hedge and very well positioned to continue to capture solid prices. 30% of our expected annual ethanol production is stored in our tanks. to be sold in the following quarters. This decision to carry forward ethanol is already proving to be a good one, as prices are expected to increase following the increase in gasoline prices and the auto cycle growth. The reason why our sugarcane plantation is in great shape is because of our focus on achieving efficiencies, as I mentioned before, Throughout the past years, we have put a special focus on our farming activities. As a result, we are reaching incredible levels of TRS content per hectare. For example, We implemented muda prebrotada or pre-sprouted seedling through the multiplication of Meristem, which is a technology only used by us. This enables us to reproduce cane varieties that are better adapted to our region at a much faster pace and replace the older varieties. We even built a factory that now produces 26 million mudas every year. We are using two-line harvester, which not only reduces diesel consumption per ton, but also soil compaction, leading to better yields of sugarcane. We use biological pesticides to control plates. We use drones and artificial intelligence to monitor our plantation and apply herbicides only in the areas with weed infestation. among many other examples. These innovations are good not only for our productivity levels, but also reduce our costs per ton and improve our carbon footprint. Another good example of this is our production of biomethane, which we are already using to power more than 130 vehicles replacing diesel consumption. We are very happy with the region where we are located with our sugarcane plantation and our mills, the work that we did, and the potential that we still have ahead. Now, let's move into our farming business in Argentina and Uruguay. In our crops business, as we mentioned in the past releases, we experienced an unprecedented drought. Our results in this segment are a reflection of this. We are focused on the 23-24 campaign where we are starting fresh with no long-term impact in our earning potential from the drought. We have already started planting activities and we have good expectations for the new crops with the favorable El Niño forecast. In our daily business, last year we finished populating our four freestones. Productivity per cow came marginally down as we navigated the challenges of operating at full capacity. This year, productivity is at record levels, reaching almost 38 liters per cow per day on average. In terms of prices, there is a mixed performance, but we have the flexibility to adapt to the context. In the case of our rice business, The decision we made last year to set a foot in Uruguay by acquiring four rice mills strategically located is already paying off. In Argentina, even after a dry year, we managed to do very well. We own and operate one of the largest fully integrated rice operations in the world under a sustainable production model where we develop our own seed genetics and produce varieties customized to our clients' needs. We are building trusting relationships with clients all over the world and consolidating as a leader of this market, offering high quality rice and full production traceability coming from Uruguay and Argentina. Now, we have a huge opportunity in front of us There is a lack of water in many rice producing countries of the world. And they are cutting their rice exports. This means that there will be a very clear need for South American rice. Having operations in Argentina and Uruguay, we are uniquely positioned to benefit from this. Another thing we are very enthusiastic about is the work we are doing in the ESG front. We have been working on emphasizing the sustainability profile of our production models and monetizing them. The sale of carbon credits in Brazil is the most obvious example, but we also have several certifications for our products and processes and clients willing to pay a premium for them. Sustainability is part of our DNA. Every day we work to develop sustainable production models in the interior of the countries where we operate. In our integrated ESG report, we show with great details how we do this. I invite all of you who are interested to read it. We have a very positive outlook ahead. Also, we are complying with our distribution policy. We recently distributed dividends and we continue repurchasing shares, always maintaining our debt debits below two times a BDA. To conclude, I want to thank our teams. This year started off with many challenges, but with your hard work and commitment to efficiency, we now have a very positive outlook ahead of us. I feel confident that we will continue to generate good returns and value to 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. Gross sales totaled $407 million during the second quarter, making a 6% year-over-year increase, while on an accumulated basis, it reached $654 million, 11% higher than the previous year. This was mostly explained by our commercial decision to favor sugar production and execute sales at solid prices, coupled with higher average selling prices in our rice division. Consequently, adjusted EBITDA expanded to $136 million during the quarter, whereas year-to-date it stood at $226 million, 15% and 10% higher than its respective previous periods. Please turn to slide five for a broader view of our consolidated financial figures. As you can see on the bottom right chart, Crushing volumes in our sugar, ethanol, and energy business were up 42% on a year-to-date basis on account of greater sugarcane availability and solid productivity indicators. On the other hand, total production in our farming division reported a 27% year-over-year reduction, mostly explained by crops, due to the effects of an unprecedented drought in Argentina, which impacted area and volume produced. Let's move ahead to slide seven with the operational performance of our sugar, ethanol, and energy business. Crushing volume amounted to 3.6 million tons during the second quarter, making a 9% increase versus the prior year. This was mostly driven by solid productivity indicators enhanced by good precipitations registered during the first six months of the year. Thus, agricultural productivity indicators such as yields presented a year-over-year improvement from 60 to 78 tons per hectare in the quarter, while TRS content increased from 119 to 126 kilograms per ton. In terms of mix, we diverted as much as 48% of our TRS to sugar production, in line with our strategy to maximize production of the product with the highest marginal contribution. Within our ethanol production, 70% was anhydrous, and to further profit from the premium that this ethanol commanded, we dehydrated over 22,000 cubic meters of hydrous ethanol stored in our tanks. On a year-to-date basis, crushing volume reached 5.1 million, 42% higher year over year. This is explained by a significant improvement in yields and tier S content, as well to the greater sugarcane availability, which enabled us to resume our continuous harvest model during the first quarter of 2023. As mentioned before, Production mix stood at 48% sugar in line with the quarter, as shown in the bottom right chart, while we maximized sugar production throughout the first semester to profit from the rally in global sugar prices. The opposite was observed last year as ethanol prices reached record levels in Brazil. This proves the high degree of flexibility of our mills. Please turn to slide 8, where we would like to describe our sales throughout the year. Net sales amounted to $179 million during the quarter and $274 million in the first semester, making a 9% and 18% increase compared to the previous year respectively. In both cases, This was driven by higher sugar sales on higher production and prices, which fully offset the year-over-year reduction in ethanol sales. As you can see on the top left chart, selling volumes of sugar amounted to 317,000 tons year-to-date, as our mixed decision favored sugar production to capture the price premium over ethanol. Consequently, our average selling prices increased 9% during the first semester, and we benefited from an excellent sugar prices. In the case of ethanol, the decrease in volume sold was driven by reduction in ethanol production, coupled with our commercial decision to increase our carryover stocks. The year-over-year comparison does not see fair. During the second quarter of 2022, we took advantage of a market opportunity that ethanol offered and sold ethanol at very attractive prices. As explained in prior releases, last year we sold most of our ethanol volumes at prices as high as 26 cents per pound equivalent, taking advantage of a shortage in supply caused by the late start of harvesting activities in Brazil. It is worth highlighting that this year we also benefited from a peak in demand and sold 52% of our ethanol volume there, capturing 12% above the average price of the quarter. Within the 132,000 cubic meters of anhydrous ethanol sold year to date, 22,000 cubic meters were exported at an average price of 20.5 cents per pound equivalent. out of which 16,000 cubic meters were conducted during the second quarter at an average price of 20.8 cents per pound. This is so since we have the necessary certifications and industry capacity to meet product specifications. On an accumulated basis, Energy selling volumes increased 13% compared to the prior year, even though its average selling price decreased by 10% due to low energy spot prices. Regarding carbon credits, year-to-date, we sold over 250,000 ceballos, 34% lower than the previous year, at an average price of $18 per ceballo. This is explained by the lower year-over-year production and sale of ethanol, which led to a lower amount of carbon credits issued. Please go to page 9, where we would like to present the financial performance of the sugar, ethanol, and energy business. adjusted VTA amounted to $117 million and $194 million during the second quarter and the first half of the year, respectively. In both cases, the increase in adjusted VTA was driven by higher net sales, as well as gains in the mark-to-market of our harvested cane on higher crushing volume. However, results were partially offset by a year-over-year loss reported in the mark-to-market of our commodity hedge position. 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 approximately 15% higher than in 2022. as we have sufficient sugarcane availability to use our industrial capacity. This, in turn, will result in a reduction of unitary costs due to better dilution of fixed costs. From our commercial point of view, sugar prices continue to be supported by strong fundamentals and are trading on average about 24 cents per pound. We are in an excellent position to profit from this scenario as we have 25% of our expected 2023 sugar production unhedged and for 2024, 90% of our sugar position remains open. In the case of ethanol, we are taking advantage of our storage capacity to carry over production into the following quarters to profit from higher expected prices. We believe that ethanol will continue to play an important role in the energy transition matrix, not only in Brazil, but globally. And we believe ADECO Agro will make its contribution. Now we would like to move on to the farming business. Please go to slide 12. As of the beginning of August 2023, we harvested 96% of the total area and produce over 800,000 tons of agricultural produce. The remaining hectares are expected to be fully harvested during the rest of this month. As anticipated, yields for most of our summer crops presented a significant decline compared to the previous campaign due to record drought that Argentina and Uruguay experienced as a consequence of La Niña weather event. Nevertheless, there have been positive developments impacting the price of some of our products, which help us to partially mitigate the weak performance at the farm level. The Argentine government passed a resolution that allowed for the use of a preferential FX rate to convert the proceeds from sales of rice, soybean, corn, peanut and sunflower, which partially offset the decreasing yields. Also, in the case of rice, India, the world's largest rice exporter, recently announced the ban of long grain white rice exports to secure domestic supply. Thus, We expect to profit from this thanks to our flexibility to sell into the export market and offer full product traceability. To conclude, we began planting activities for our next campaign, starting with wheat and other winter crops. We expect a positive outlook for the upcoming season, especially since the weather forecast is shifting to moderate and linear pattern, which should allow for an improvement in soil moisture and recovery the outlook for the 2023-2024 harvest season. On the following page 13, we would like to present the financial performance of our farming and land transformation businesses. Adjusted EBITDA totaled $24 million in the quarter, making a 22% year-over-year increase. Year-to-date, adjusted EBITDA was 43 million, 23% lower than the previous year. In both cases, this was explained by an outperformance of our rice and dairy divisions, which fully offset the poor performance of crops as expected due to the record drought caused by La Niña weather that affected yields. Starting with our crop business, adjusted VTA amounted to $313,000 and $509,000 during the second quarter and first semester of the year respectively. As previously explained, results were mainly impacted by the reduction in yields, coupled with a genuine increase in costs in US dollar terms as a reduction in planted area versus the previous season. Adjusted EBITDA in our rice business was $15 million during the second quarter and $27 million on an accumulated basis. Despite a reduction in yields compared to the previous campaign and higher costs in US dollar terms, adjusted EBITDA was higher year over year. This was driven by an increase in both volume and average selling prices due to a better mix of higher added value products, as well as the use of the preferential exchange rate mentioned above, among other factors. Moving on to the daily business, adjusted VDA total $10 million, 41% higher than prior year, while year-to-date it stood at $16 million, making a 15% year-over-year increase. Results were explained by higher average selling prices as we produced more fluid milk for the domestic market, which offered the highest marginal contribution during these periods, coupled with our continuous focus on achieving efficiencies in our vertically integrated operation. Results were partially offset by higher costs, including cost of feed of our dairy calves. 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 solving 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. According to our distribution policy, we are committed to a minimum distribution of 40% of the gas generated during the previous year via a combination of gas dividends and share repurchases. In terms of dividends, on May 24, we paid $17.5 million in cash dividends, representing approximately $0.16 per share, which corresponds to the first installment of our annual cash dividend. The second shall be payable in or about November in an equal cash amount, resulting in an annual cash dividend of $35 million. In addition, We have already repurchased $14 million in shares year to date, which represents approximately 1.6% of the company's equity. Moving on to the debt position, our net debt increased 3% compared to the same period of last year, amounting to $852 million. This was explained by the financing of our working capital requirements, mainly related to advance purchases of agricultural inputs at attractive prices in order to take advantage of low cost of capital. Furthermore, the Brazilian Real appreciated 8% versus the prior year, consequently impacting our debt denominated in such currency. As of June 30th of 2023, our liquidity ratio reached 1.3 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, 29% 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 complementary projects, such as the construction of our second biodigester in Brazil to increase our biogas production, which later is converted into biomethane and is used to replace our diesel consumption. In our farming division, we are finalizing the construction of our second biodigester in our dairy business, which will be using cow manure as an input to generate renewable energy project that is aligned with our sustainability committee. Thank you very much for your time. We are now open to questions.