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 3rd Quarter 2023 Results Conference Call. Today with us we have Mr. Mariano Bosch, CEO, Mr. Emilio Nieco, 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 ADECO Agro 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 Agro's 2023 Third Quarter Results Conference. As you may have seen in the report, we are presenting very good operational and financial results. Our adjusted EBITDA during the quarter was $155 million, 27% higher compared to last year. We are very enthusiastic about how our sugar ethanol and energy business continues to perform. Last quarter, I mentioned some of the work we started doing a few years ago to enhance the productivity of our sugarcane plantation. I mentioned innovative techniques like pre-sprouted seedling and its reproduction in our own bio factory. the incorporation of state-of-the-art farming equipment, the use of drones and artificial intelligence, biological pesticides, et cetera, et cetera. During this quarter, we saw the results of our work. For example, we achieved record-crushing volume of 4.5 million tons. The quantity and quality of our sugarcane plantation is in an excellent shape. with a TRS content per hectare over 30% higher year over year. With this sugar cane, we produced a record volume of sugar. Indeed, we focused on solving minor bottlenecks in our sugar kitchen and were able to produce sugar above our nominal capacity, increasing our already large flexibility. And this came at a time when sugar commanded a premium over hydroxethanol of more than 50%. We remain with our hedges open and very well positioned to continue taking advantage of these price opportunities. Brazil is the most efficient country in the world in the production of sugar, and we own one of the most efficient operations in Brazil, and therefore in the world. The region of Mato Grosso do Sul, where our cluster is located, allows us to mill all the year round, maximizing our milling time while at the same time diluting our costs. We are very proud of our operational teams for the constant search of efficiencies and opportunities to expand our production. Now let's move into our farming business in Argentina and Uruguay. As you already know, this year we experienced the worst drought in history. This had an impact in our results. But during the year, we focus on strengthening efficiencies across all of our operations, finding saving opportunities to mitigate the impact. In the crop business, our results were significantly affected by the drought, as we mentioned in the past releases. But this is now behind us. We are starting fresh with the 23-24 campaign. All of our teams are fully focused on planting activities, which are being conducted under excellent conditions. El Niño weather event that we have been talking about for the past months is now here and has improved soil humidity across all of our productive regions. We are in an excellent situation to maximize yields in all our crops and go back to normalized EBITDA levels for this segment. In the case of our rice business, we are achieving even better results than last year. A big part of this was thanks to the decision we made last year to set a foot in Uruguay by acquiring rice mills. This offered greater sustainability to our operations and provided us with more commercial tools. We are entering into new markets offering clients customized varieties of high-quality rice developed in our own seed unit and full product traceability. This better mix of higher value-added products is allowing us to book premium on top of the high global price prices. In terms of the 23-24 campaign, water reservoirs recovered thanks to the range received, So we have the necessary water levels to secure a successful campaign. So far, we have already planted 80% of our plan. In our daily business, we are achieving results in line with last year. The impact of the drought was mainly seen in higher costs of feed. However, we were able to mitigate this with the record high productivity levels in our fully populated fruit stores. Also, having the flexibility to sell into the domestic and export market and switch production from one to the other was key during this month of lower powder milk prices. Regarding our land portfolio, During the quarter, we sold the farm in Argentina for more than 20% above our independent appraiser and with a very attractive IRR. A quick note on ESG. As we always say, since inception, we have been focused on developing sustainable production models in the interiors of the countries where we operate. Part of the work we have been doing with our ESG committee is to better communicate how we create value from an economical, environmental and social point of view under a robust corporate governance model. We are proud to see that our work is paying off and ESG rating agencies like Sustainalytics rank us among the leading players in our industry. In the meantime, we continue making progress in our operations. For example, in our production of biomethane, which we are already using to power more than 130 vehicles, replacing diesel consumption. Finally, in terms of distribution, we are complying with our policy, always maintaining our debt levels below two times EBITDA. Next week, On November 24th, we will be paying the second installment of our cash dividend. This represents an annual dividend of $35 million or 33 cents per share. On top of the $24 million we have already invested in share repurchases this year. To conclude, I want to thank our team. It is because of your hard work and effort that despite the very challenging start of the year, we are managing to end it with a very positive outlook ahead. Thank you to our shareholders for your continued support. Now I will let Emilio walk you through the numbers of the work.

So I don't make any noise, but if you need anything, I'm here. Okay.

$188 million during the third quarter, making a 2% year-over-year increase, while on an accumulated basis, it reached $1 billion, 7% higher than the previous year. This was mostly explained by greater productivity indicators in our sugar, ethanol, and energy division. which enabled us to increase our sugar production and execute sales at solid prices, coupled with higher average selling prices in our rice and dairy businesses. In addition, during September, we completed the sale of El Meridiano Farm for a selling price of $48 million, fully collected at the closing date. Consequently, adjusted EBITDA reached $155 million during the quarter, whereas year-to-date it stood at $381 million, 27% and 16% higher than its respective previous periods. Now, please turn to slide 5 and direct your attention to our production figures. As you can see on the bottom right chart, crushing volumes in our sugar, ethanol and energy business were up 31% on a year-to-date basis. Higher crushing translates into higher production volume, which drives sales at the same time as it dilutes costs. This was mostly possible thanks to the implementation of innovative agriculture techniques such as pre-sprouted seedling, which enable us to reproduce sugar cane varieties that have better performance both in yields and tier S content in our regions. On the other hand, total production in our farming division reported at 29% year over year reduction, mostly explained by the reduction in yields and planted area in our crop segment because of La Niña weather event. Let's move ahead to slide seven with the operational performance of sugar, ethanol, and energy business. During the third quarter, we marked a new record in crushing volume of 4.5 million tons, 20% higher versus the prior year. This was mostly driven by solid productivity indicators such as yields, which presented a 27% year-over-year improvement to 82 tonnes per hectare during the quarter, while TRS content increased 3% to 145 kilograms per tonne. In terms of mix, we diverted as much as 49% of our TRS to sugar, in line with our strategy to maximize production of the product with the highest marginal contribution. In fact, throughout the quarter, we were able to produce more sugar than our nominal industrial capacity thanks to small adjustments made in our sugar kitchen to reduce bottlenecks and benefit from the high TRS per hectare and profit from this price scenario. Consequently, sugar production reached 320,000 tons during the quarter, making a new record for our mills. Within our ethanol production, 96% was hydrous, which can be dehydrated at any time and turn into anhydrous ethanol and be sold either to the domestic or export market, wherever the price premium is great. On a year-to-date basis, crushing volume reached 9.6 million tons. 31% higher year over year. As mentioned before, this is mostly explained by a significant improvement in yields and TRS content, as well as to greater sugarcane availability, which enabled us to resume our continuous harvest model during the first quarter of 2023. The reaction mix stood at 48% sugar and 52% ethanol on a year-to-date basis. As shown in the bottom right chart, while we maximized sugar production throughout the first nine months of the 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 third quarter as ethanol prices decreased. This proves the high degree of flexibility of our mills. Let's please turn to slide eight, where we would like to describe our sales conducted throughout the year. Net sales amounted to $190 million during the quarter and $471 million year to date, making a 17% and 16% 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 546,000 tons year-to-date, as our mixed decision favored sugar production to capture the significant price premium over ethanol. Consequently, our average selling prices increased 20% versus the prior year. In the case of ethanol, we made the commercial decision to reduce sales and build stocks as prices have decreased due to high supply levels in Brazil. In addition, it must be recognized that the year-over-year comparison is not fair, as in April 2022, we took advantage of a market opportunity that ethanol offered and sold our production at very attractive prices. It is worth highlighting that within the volume sold year-to-date, we exported 29,000 cubic meters at an average price of 19.6 cents per pound of sugar equivalent. This is so since we have the necessary certifications and industry capacity to meet product specifications. On an accumulated basis, energy selling volumes increased 14% compared to the prior year, but the average selling price decreased by 9% due to low energy spot prices. Regarding carbon credits, we sold $2 million worth of surveyors during the quarter. making a 33% year-over-year increase on higher average selling prices, which fully offset the lower volume of Ceballos issued on lower ethanol sales. Year-to-date, we sold over 320,000 Ceballos amounting to $6 million in sales. 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 $115 million and $308 million during the third quarter and on an accommodated basis, respectively. In both cases, the increase was mainly driven by higher net sales. However, results were partially offset by a year-over-year loss reported in the mark-to-market of our commodity hedge position on higher global sugar prices. 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. Assuming weather going normal, we maintain our expectation to increase 2023's crushing volume by 15% compared to 2022, as we have sufficient sugarcane availability to utilize in our industrial capacity. This, in turn, will result in a reduction in unitary cash costs due to better dilution of fixed costs. From a commercial point of view, sugar prices continue to be supported by strong fundamentals, and the closest contract is trading on average about 27 cents per pound. We are in an excellent position to profit from this scenario as we have 11% of our expected 2023 sugar production unhedged. And for the 2024, 82% of our sugar position remains open. In the case of ethanol, party at the pump currently stands at 62 percent, pressured by greater gain of productivity in the center-south region and limited storage capacity. Consequently, we expect prices to recover towards the end of the harvest season when the offered pressure is over and the demand is greater. For that reason, we are currently taking advantage of our ethanol tank storage capacity to carry over production into the following quarters. in the meantime we are profiting from opportunities in the export market past the end of the third quarter we sold 25 000 cubic meters of anhydrous ethanol to us now we would like to move on to the farming business please go to slide 12. as of the end of october 2023 We concluded harvesting activities related to our 2022-23 harvest season and produced over 800,000 tons of agricultural produce. As previously stated, yields for most of our summer crops presented a significant decline compared to the prior campaign because of La Niña weather events. On the other hand, planting activities for our 2023-24 campaign are currently underway and we expect a positive outlook as weather has shifted to El Niño. Recent rains registered in almost all the productive regions of Argentina and Uruguay has allowed for an improvement in soil moisture and recovery of water reservoirs, favoring planting activities for our summer crops. Consequently, we see a potential upside in planting area for rice, as well as full recovery in adjusted VDA generation in our crops business in 2024, since there is no long-term impact in our earnings potential from the past dry weather. On the following page 13, we would like to present the financial performance of our farming and land transformation businesses. Adjusted EBITDA totaled $47 million during the quarter, making a $30 million year-over-year increase. Year-to-date, adjusted EBITDA was $90 million, 23% higher than the previous year. In both cases, this was 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 crops and from the dairy business. Starting with our crop business, adjusted BTA amounted to $98,000 and $607,000 during the third quarter and first nine months of the year respectively. As previously explained, results were mainly impacted by the reduction in yields, coupled with a genuine increase in costs in dollar terms and a reduction in planted area versus the previous season. Adjusted EBITDA in our rice business was $11 million during the third quarter and $38 million on an accumulated basis. This was driven by an increase in the average selling price 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. It is worth highlighting that India, the world's largest rice exporter, banned the export of long grain white rice to secure domestic supply. Consequently, we expect to continue capturing these higher prices in the short to mid term as demand shifts to South American rice due to limited supply from Asian countries. Moving on to the dairy business, adjusted VDA total than the prior year while year to date it stood at 23 million dollars making a four percent year-over-year reduction results were explained by higher average selling prices as we produce 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 operations However, these results were partially offset by higher costs in dollar terms, especially cow fee. During September 2023, we completed the sale of El Meridiano farm located in the province of Buenos Aires, Argentina, for a selling price of 48 million dollars, which was fully collected at the closing date. I would like to point out that the farm was sold at a 29% premium to the 2022 Cushman and Wakefield's independent farmland appraisal. Let's now turn to page 15, where we would like to present our capital allocation strategy. As a way of reminder, during 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 cash generated during the previous year via a combination of cash dividends and share repurchase. In terms of dividends, on November 24th, we will make our second cash dividend payment of $17.5 million, which represents approximately 16 cents per share. The first installment was paid on May 24th of $35 million. In addition, we have already repurchased $24 million in shares here today, which represents approximately 2.4% of the company's equity. Moving on to our debt position, our net debt amounted to $707 million, making a 13% decrease compared to the same period of last year and a 17% quarter-over-quarter reduction. This was explained by our net cash from operations generated during the last 12 months and the company's financial strategy, which in turn enabled us to reduce our net debt position while also attending our distribution policy and growth projects. As of September 30, 2023, our liquidity ratio reached 1.8 times, showing the company's full capacity to repay short-term debt with its cash balances, whereas our net leverage ratio was 1.5 times, 0.6 times down compared to the previous year. To conclude, 28% 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 and the construction of our second biodigestion in Brazil. Once concluded, the latter will enable us to increase our current biogas production, which is then converted into biomethane and used to replace our diesel consumption. As of today, we have over 120 lightweight vehicles adapted and running with biomethane, as well as other eight heavyweight vehicles. In our farming division, we have renewed our cheese production line in Morteros facility, Investments made will contribute to accessing new markets and clients through the production of other types of semi-hard and hard cheeses while simultaneously decreasing the amount of waste generated throughout the entire production process. 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 in the Q&A section or click on Raise Hand for audio questions. Please remember that your company's name should be visible for your question to be taken. We do ask that when you pose your question that you pick up your headset to provide optimum sound quality. Please hold while we pull for questions. Our first question comes from Thiago Duarte from BTG Pactual. Your microphone is open.

Hi, hello, everybody. Thanks for the opportunity. Yeah, two questions on our side here. The first one is with regards with the evolution of, you know, the crushing pace in the sugar, ethanol and energy business. and particularly looking at the evolution of the productivity, which has been really strong this year. And so the question is really about whether you see upside risk to the 15% increase in crushing volumes that you have guided for the year, because it does seem like you have a lot more raw material available to crush than only 15% increase. And obviously, if you're keeping the 15% increase, whether we should be seeing more cane being carried over into the next crop and whether we could see a bigger crushing next year relative to around 12 million tons this year. So that would be the first question. And the second one is also on the sugar business. We have started to see different players announcing different sorts of investments in order to increase their capacity to produce sugar or to increase their sugar mix as opposed to ethanol. And obviously with sugar prices trading where they are relative to ethanol, it does seem to make sense even for some mills that historically haven't made much sugar. So the question is whether... you guys are considering the possibility of doing the same. And obviously, whatever you can share with us with that regard, that would be great to hear as well. Thank you.

Hi, Thiago. How are you? Thank you for your question. Renato will take your first question and then I will take the second one. Renato, regarding the evolution of crashing and the upside risk compared to the 15% we already guided.

Okay. Hi, Thiago. Thank you for your question. I think the weather this year is being very good. We are not seeing periods of excess nor lack of moisture in the soil. So this is very good for crushing. So we are crushing, our crushing basis is doing pretty well. And also the perspective of the yields are really good too. So we are confident that we are going to achieve this 15%. more crushing compared to last year. Regarding the risk of crushing more than 15%, I think it's possible, but of course it depends on the use of time in the last quarter. Last quarter is always difficult to predict the use of time. So considering a historical use of time, we should be crushing 15% more cane than last year. And we think that we are going to be in a very good position to crush in the first quarter of next year. The sugar cane looks good, looks very good. So we will be, I would say, plenty of sugar cane to be crushed in a very intense quarter in the first quarter. So that's the first question.

And regarding the second question, Thiago, we've been making small investments during the full year. And as you can see, every quarter, we are increasing the amount of sugar that we are producing on the mix. So we are going to end up on up to 52% of sugar of the total TRS. And so this year, we are very optimistic on achieving these numbers that are above the nominal capacities. When you hear the other guys building sugar factories, it's because they don't have any sugar factory. We do have sugar factory in all our meals. So what we are doing is increasing marginally the productivity of each one of the factories. So for next year, we can still see an increase of the sugar production, of the total sugar production, because of this increase that Renato was talking about and because of maximizing sugar since the very beginning. So what we are investing is on making the process of our sugar factory work properly. perfectly well all the year round for next year. That's where we are today regarding the sugar mix investment.

Perfect. Thank you. And just to follow up on Renato's comments, are you guys ready to sort of, I don't know, point or guide towards an additional increase in sugarcane volumes into next year? Would that be... reasonable or feasible to think relative to this year?

Yes, we think that that's a reasonable relative to this year. Of course, as Renato explained, our sugar crushing is variable according to the use of time of the sugar mills, but assuming weather going normal, we should have an increase of at least 5% and maybe up to 10% when we compare to this year. And that's something that if we continue to do the same thing that we've been doing, we can certainly be there. That's very helpful. Thank you, Mariano.

Next question from Ladisa Perez from Itaú BBA. You can activate your microphones.

Good afternoon. Can you hear me all right?

Yes, perfectly well.

Okay, thank you. Thank you, Mariano. Hi, everyone. Thank you for taking our questions, and congratulations once again on the very strong results. I have two questions on the sugar and ethanol side. First, I was wondering if you could provide us some more perspectives on your forecasted destocking phase, particularly for ethanol. I mean, in other words, what should we expect in terms of selling volumes for the next quarter? And in that context, I was wondering if you could provide us some color on your storage capacity for ethno or if you currently have enough storage capacity or if you're having to lease third party storage facilities. And how do you think that compares to your regional peers? My second question would be on capital allocation as well. I remember that a couple of months ago, we discussed the possibility of the company increasing its planted area in Mato Grosso do Sul, given the strong outlook ahead for the sector. And I was wondering if you have any updates on that front that you can share with us right now. I mean, if Ecoagro were to increase its sugarcane planted area, would that involve converting pasture land or would you lease land already used for sugarcane? something amongst that line. Thank you once again and congratulations on the results.

Thank you, Larissa. Renato will take your first question and I will take the second one. So, Renato, do you want to clarify regarding the setting volumes of ethanol and storage capacity?

Hi, Larissa. We think that the low parity ratio at the pumps now, and the level of demand of ethanol that you have been seeing is going to increase this disparity towards the 7%. Probably we're going to see this in the next months. So we are taking advantage of all our tanks' capacity, and also we are leasing some tanks outside of our mills. So at this moment, we have approximately 250,000 cubic meters stored. So we will be feeling the market, how quick the price should go up to start selling our volume between the fourth quarter and the first quarter of next year.

Okay. Thank you, Renato. That is regarding the capital allocation and the planted area. Of course, within the growth project that we have, we've always indicated that growing the planting area or the amount of sugarcane that we produce in the cluster is probably the most efficient investment that we've been doing. And as we've been growing, we are able to lease land mainly from pasture land. One of the advantages that we have is that we don't have competition in sugarcane land. with other sugar mills because of our specific location or the competition is very low. So in general, when we plant new sugar cane, we convert pasture lands into sugar cane. That's basically what we've been doing. This year, 2023, we are planting 8,000 hectares of new planted hectares, being specific on answering your question.

Thank you. That was super clear. Thank you.

Once again, if you have a question, please write it down in the Q&A section or click on Raise Hand for audio questions. Please hold while we pull for questions. For the written questions, I'll pass the floor over to Victoria, Investor Relations Officer.

We received a question from Julia Rizzo from Morgan Stanley, and she asks, I would like to ask about next year, crushing and mix. Sugar production could go as much as the 3,020 times four quarters. Basically, is it possible that each quarter we could see the same record volume of sugar production than we did this quarter?

Okay, I can take directly the question. As Renato explained very clear, the crashing volume that we are already expecting for 2024 is between 5% to 10% more than this year. And regarding the specific amount of sugar that we can produce, this quarter that we are announcing today, we produce these 320,000 tons of sugar. That is an absolute record because of all these investments and adjustments that we did that I also just mentioned. Doing that, the four quarters, I think it's too challenging, mainly because of the amount of sugar cane that we harvest every quarter. The quarter that we are just finishing is usually the more dry quarter of our cycle. Being dry means that we can be harvesting and milling all or most of the time. In all the other quarters, it's more difficult to reach that level or that amount of crashing days. That's why I see it too challenging making 320. Can we do 20% less? Yes, I think we can do 20% less by quarter, but we can repeat this same 320 times. for the same quarter of the next year. And maybe the previous quarter, the second quarter of the year, is also a quarter that is usually more dry. So the semester during wintertime is more used for having more sugar cane than the other quarter. That's basically the answer.

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.

Thank you everyone for joining today and we hope to see you in our next upcoming events.

Thank you. This concludes today's presentation. You may disconnect at this time and have a nice day.