Adecoagro S.A.

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to ADECOagro's second quarter 2024 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 a 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 provided. 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 factors 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 2024 Second Quarter Research Conference. Before going into the highlights of each business, I would like to make some comments on our shareholders' distribution. As of this date, we have exceeded in $16 million our minimum distribution policy. So far, we invested $51.4 million to repurchase 5.2 million shares, equal to 4.9% of the company's equity, and also committed $35 million in cash dividends. with the first installment being already paid. Furthermore, our board of directors approved the renewal of our buyback program, which enabled us to repurchase up to an additional 5% of the company's equity up to year end. Consequently, we expect to continue allocating cash in share repurchases during the second half of the year. This clearly shows our commitment towards sharing results with our shareholders. While we continue investing in growth projects with attractive IRRs and maintaining our depth levels. Now, moving on the results, Consolidated adjusted EBITDA during the quarter reached $140 million, 3% higher year over year, whereas year to date amounted to $230 million, that is 2% higher than last year. Starting with our sugar, ethanol, and energy business, the investments done in expansion planting are paying off. Given the good cane availability, we have crushed more, produced more, while our unitary costs remained unchanged. Despite the lower than average rainfall received, having ample cane availability has become a competitive advantage for us. Although sugar continues to be the best product, ethanol prices are also recovering. Still so, the lower than expected yields and the year-over-year decrease in selling prices were the main drivers towards the decline in adjusted EBITDA generation for this business. In our farming business, adjusted EBITDA generation almost doubled during the first semester versus prior year. This was possible thanks to our decision to expand our rice footprint into Uruguay and its consolidation to our already vertically integrated operation. This, in turn, has placed us as a relevant player in the region, always with the focus of being the low-cost producer. In crops, normal weather conditions after experiencing the worst drought in Argentina's history are the main explanations towards the better results, even though these are lower than expectations due to the decline in international prices. Lastly, in dairy, We continue to consolidate our position in both the domestic and export market with the development of our high value added products, leading to better results each quarter. Before passing the word to Emilio, a brief update on ESG. In mid-May, we published our 2023 integrated report in which we reinforced our commitment towards reducing our carbon intensity by 2030. Moreover, an in-depth description of our sustainable production model is also available, together with our ESG strategy and practices. To conclude, I would like to express my gratitude to all our people across ADECO Agro for their hard work. I am convinced that we have the right people and that we are following the right strategy to generate good returns and value for our existing 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 $398 million during the second quarter, while on an accumulated basis, it reached $651 million. Although volume sold for most of our products represented a significant year-over-year increase, results were partially offset by lower prices for some of the commodities that we produce. That being said, adjusted EBITDA reached $140 million during the quarter, whereas year-to-date, it stood at $230 million. Higher results during the quarter were driven by the sale of La Fecuaria Farm, booked within our crops segment as well as to an outperformance of our dairy segment. This in turn partially offset the lower results in our rice and sugar, ethanol and energy operations. Now please turn to slide five regarding our production figures in the bottom right charts we can see that crushing volumes in our sugar, ethanol, and energy business were up 21% versus the same period of last year. Higher crushing translates into higher volume and better dilution of fixed costs. In our farming division, the increase in the production of grains was explained by a significant recovery in yields on normal weather conditions during the development of our crops, as well as to higher planted area. Let's move to slide seven with the operational performance of sugar, ethanol, and energy business. Crossing volumes amounted to 4 million tons during the quarter and 6.1 million tons on an accumulated basis. The increase in crushing was mainly driven by greater sugarcane availability, thanks to our expansion planting activities and higher effective milling days due to the dry weather experience year-to-date. Regarding productivity, TRS per hectare remain in line versus the prior presenting a slight decrease in yields. In terms of mix, we continued to maximize sugar production, given its attractive premium over ethanol. Within our ethanol production, we were maximizing the production of hydrous ethanol, as demand for this type of ethanol has been significantly increasing and gaining market share, offering the better margin. If required, we can dehydrate our ethanol at any time. Let's please turn to slide 8, where we describe sales conducted throughout the periods. Net sales amounted to $172 million during the quarter, while year-to-date reached $275 million. As you can see on the top left chart, the decrease in the selling price of sugar was mostly due to lower global prices driven by a stronger pace of milling in Brazil during the first half of the year. In the case of ethanol, selling prices continued below the previous year on greater supply. Having said this, volume sold throughout the quarter was timely done to profit from spikes in prices. Moreover, we continue holding to our ethanol inventories to profit from better prices in the future. This represents 84% of our year-to-date ethanol production. Moving on to energy, we focused on complying with our long-term energy contracts. However, lower prices and a weaker Brazilian REI dropped the decline in sales. Regarding carbon credits, we have already sold over 240,000 Ceballos at an average price of $17 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 amounted to $107 million during the second quarter and $159 million for the first half of the year. Despite presenting year-over-year gains in the mark-to-market of our commodity hedge position, results were offset by year-over-year losses in the mark-to-market of our biological assets on lower expected yields coupled with declining net sales. 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 normal weather for the remaining six months of the year, we focus on increasing annual crushing volume versus 2023, given good harvest space and cane availability. From a commercial point of view, The evolution of sugar prices will mostly depend on Brazil's crushing volume for the rest of the year, as well as on its industrial flexibility to reach the total annual production expected by the market. We have approximately 30% of our expected 2024 sugar production still unhedged, while the balance was committed at an average price close to 23 cents per pound. In the case of ethanol, demand remains strong, given its attractive price versus gasoline, consequently absorbing new supply and supporting the recovery in prices. We expect to sell our inventories over the following quarters, as we believe ethanol prices have room to continue increasing due to the current low parity at the pump, as well as to the sugar max scenario in Brazil. Now we would like to move on to the farming business. Please go to slide 12. By the end of July, we harvested 98% of the total area and produced over 1 million tons of agriculture produced. The remaining hectares are expected to be fully harvested during the rest of this month. As anticipated, most of our crops presented a significant year-over-year increase in productivity, given the normal weather conditions experienced, as opposed to last year, which was affected by La Niña weather events. In the case of late corn, our production in the northern region was negatively impacted by pseudoplasma. Consequently, our average yield reached 5.2 tons per hectare. below our initial expectations. We are planning on reducing corn area during the 2024-25 season to lower our exposure and switch to other more suitable crops. Moving on to rice, during this harvest season, we obtained an average yield of 6.1 tons per hectare. yields were negatively impacted by the excessive rainfalls received by the end of the planting window, which led to a portion of our hectares being planted outside the optimal period. Moreover, these precipitations continued throughout summertime, reducing yield potential. However, prices more than offset the reduction in production. In dairy, The increase in total raw milk production is explained by better cow productivity as we continue enhancing efficiencies in our free sales. At the industry level, we continue working on product development for the domestic and export market, offering higher value-added products as well as commodity-sized products, and being present across different price tiers with our consumer product brands. To conclude, we began planting activities for our next campaign, starting with wheat and other winter crops. The soil has recovered its moisture, enabled us to conduct our planting activities within the optimal window and to expand our planting area to the northern region, which was not included in prior seasons. On the following page 13, we present the financial performance of our farming business. Adjusted EBITDA for the farming business totaled $38 million during the quarter, whereas year-to-date amounted to $82 million. Higher results year-to-date are mainly explained by an outperformance in all three segments. Adjusted EBITDA for our crop segment amounted to $15 million, reflecting the sale of La Pecuaria Farm, which was completed in April 2024. On a year-to-date basis, adjusted BDA was $20 million. The year-over-year growth was mainly explained by this farm sale, as well as to greater yields during the 2023-24 harvest campaign. Focusing solely on our crops' results, although we saw a significant year-over-year recovery in production, Results were also negatively impacted by lower international prices for our main products, as well as to higher costs in U.S. dollar terms. Moving on to the rice segment, the year-over-year decline in adjusted VTA during the quarter was mainly explained by lower sales, coupled with higher costs in U.S. dollar terms. However, on an accumulated basis, adjusted EBITDA grew by over 50%, mostly explained by year-over-year gains reported in the market of our biological assets on higher prices. Lastly, adjusted EBITDA in our daily segment totaled $11 million during the period, whereas year-to-date, reached $18 million. Results were positively impacted by higher sales on higher prices as we improve the mix of higher value added products and maximize the production of fuel milk for the domestic market. Let's now turn to page 15, where we would like to present our capital allocation strategy. According to our distribution policy, we are committed to a minimum distribution of 40% of the cash generated during the previous year via a combination of cash dividends and share repurchase. As of today, we have already committed $86 million, $16 million more than our minimum distribution policy. From this amount, $35 million in dividends were approved The first installment, $17.5 million, was paid in May, representing approximately $0.17 per share, whereas the second installment shall be payable during November in an equal cash amount. In addition, we have already repurchased $51 million in shares under our buyback program, which represents approximately 4.9% of the company's equity. Going forward, we expect to continue with our share repurchase. To do so, our Board of Directors approved the renewal of our buyback program to repurchase up to an additional 5% of the company's equity until year-end. Please turn to page 16 for a broader view of our debt position. Net debt amounted to $632 million, making a 26% decrease compared to the same period of last year. This was explained by the financial strategy carried out in Argentina during the previous year, as well as to better results from operations, which translates into higher cash. As shown in our financial figures, the decline in net debt was done without disattending our distribution policy and growth projects. As of June 30, 2024, our liquidity ratio reached 2.9 times, showing the company's full capacity to repay short-term debt with its cash balances, whereas our net leverage ratio was 1.3 times, 0.6 times lower compared to the same period of the previous year. Subsequent to the end of the quarter, we announced a cash tender offer for up to $100 million of our senior notes due in 2027, out of which $83.6 million were accepted by the early tender date. This is an example of our disciplined and constant search for liability management opportunities to better finance our operations at attractive rates while continuing adding value to shareholders. On the following slide, we describe our CAPEX program. Expansion CAPEX represented $17 million during the quarter and $45 million on an accumulated basis. In Brazil, we continue increasing our sugarcane plantation and investing in our biogas unit in Ibinema Mill, where our biomethane production takes place. In our farm and business, we invested on minor industrial improvements in our two-day processing facilities, as well as in new harvesters for our rice operations. Thank you very much for your time. We're 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 poll for questions. Our first question comes from Bruno Tomazetto with Itaú BBA. You can open your microphone.

Thank you for taking my question. It's only one, actually. You guys have been carrying this higher level of ethanol inventory, as discussed here, and the strategy to benefit from higher prices in the future is very clear, I think. But I would like to hear more about the expected time to deploy these volumes into the market. So just wondering if you guys could please share your most updated thoughts on the ethanol price curve, perhaps from the perspective of parity to gasoline prices and the level that makes the company more comfortable to accelerate sales. Maybe the expected timing for parity reaching this level. That's it from my side. Thank you.

Hi, Bruno. Thank you for your question. I think Renato can address your question in detail. Renato?

Hi, Bruno. Thank you for your question. We are positive regarding ethanol price. The hydrogen demand has been very strong, actually 50% higher than the same period of last year. Demand is reaching almost 2 billion liters of hydros per month, and the part rate at the pump is still at 67%, which benefits the consumption of hydros ethanol. Also, the off-season is expected to be much longer than last year, so lower supply during this period. If you take the hydro stock to use right now, it's one month lower than the same period of last year. uh so we think the only way to to curb demand is through prices so prices has to to surpass the seven percent party uh rate that we we think is going to happen uh in the next months it's difficult to predict exactly when but uh in the next months that's going to be i think that is going to be the case So you have an upside of around 10% of the current prices. Remember that the current prices in dollar terms are 12% higher than the same period of last year and 25% higher than the beginning of the year.

Very clear, guys. 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. Our next question comes from Isabella Simonato with Bank of America. You can open your microphone.

Thank you. Good morning, everyone. So I have a question also on sugar and ethanol, but more focused on sugar because I think there are several moving parts at this point and the price has been quite volatile. So I would like to hear more your thoughts on on the sugar price outlook, at least for the remainder of the year. And in light of that, and what Renato just said about ethanol, right? How should we think about the mix towards the end of the season between sugar and ethanol? And my second question is on rice, right? We're definitely seeing rice prices at high levels, seasonally weaker in the last quarter. But I was wondering also if you remain optimistic about rice for the remainder of the season and if there's any outlook for 2025 as well. Thank you.

Okay, thank you for your question, Isabella. I will let Renato answer your question, the follow-up question on prices of sugar and mix. So, Renato, can you take that part of the question, and then I will take the rice prices question.

Thank you for the question, Isabella. So we remain positive with sugar price for the short term. The low levels of world sugar stocks, very low, the level of stocks, actually is one of the lowest in the last 10 years. Also, the supply of sugar is very dependent on the Brazilian crop. And Brazil is facing a difficult year in terms of weather. So the weather is very dry. And there were a cold front that hit some parts of Brazil, not helping the situation. Also, the mix is disappointing. Everyone was expecting a mix to reach 52% this year, and it seems that's not going to be possible. Mix should be more close to 50%. So, we believe that we will have some opportunities to hedge our production, the remaining production of this year and next year at higher prices. Also, we have been focused on producing added value VHP, bagged sugar. which is a 10% premium over the conventional VHP, the price of the bagged VHP. And in Mato Grosso do Sul, since we have the tax rebate program, we always have a floor to change the mix towards ethanol. The floor today is around 18 cents per pound. So if the price of sugar goes below this number, we will be changing the mix. We don't think that's going to be the case, but that's the floor. And today we have our 70% of the current estimated production heads at a price of 23.1 cents per pound.

Okay. Thank you, Renato. Is it clear, Isabella, on the sugar and ethanol? Sure, yes. Okay. If that's okay, I'll take the rice prices. Here it is important to understand that when we consider our own rice prices, this is a component that includes high-value added product, And we are producing different varieties, as we've been explaining since the beginning, where we developed a whole rice business where we sell different varieties to different clients. So we are specializing our own production and we are producing what we every client needs. So we are always going to take a different in price respect of the average price or the commodity price or the US price that sometimes we follow as a general price. So that is important to understand the increase when we compare the price of last year with the price of this year in a per ton basis. So making that clarification, the general view is that the whole region in South America will continue to have reasonable prices for all this year. And then for the following campaign, it will depend on the crop harvest in South America. Crop harvest in South America last year and the previous year was relatively low. And this year, it will depend on the planting that we are starting in a few days. So whatever happens in next year campaign will affect next year prices. So it's too early to talk about future prices in the longer term. But in the short term, we are very confident on today's level of prices.

That's clear. Thank you.

Once again, if you have a question, please write it down in the Q&A session or click on Raise Hand for audio questions. Please hold while we poll for questions. This concludes the... Sorry, we have another question from Thiago Duarte. You can open your microphone.

Yeah, thank you very much. Hello, everybody. Yeah, quick one on our side here. Just if Renato could talk a little bit about cash production costs for the year. Crushing is at a very strong pace, as you guys show. There is expectations of growth in the crushing volume throughout 2020. the year and we had previously expectations that production costs could come down as a result of combination of currency, lower input costs, and obviously the operational leverage that your business should be capable of generating. So just if we should expect something different in terms of year-over-year production costs in the second half of the year relative to what we saw in the first half of the year in the sugarcane business. That would be all. Thank you.

Thank you, Diago. Renato?

Thank you for your question, Thiago. Regarding the production costs, there are some components that are decreasing, such as fertilizers, freight, and leasing rates. And some components that are increasing, such as salaries, according to the legislation, third-party services, and diesel. Third-party services just because of the diesel. And the yields should be slightly lower than the one that we obtained last year, especially because of the dry weather. And the milling should be slightly higher. because we have, as Mariano mentioned, planting and focusing a lot on expanding our plantation, and also because we acquired some opportunistic third-party sugarcane. If you take all those factors into the equation, we think that our costs in reais should be very similar to the one that we had last year. Thank you, Mariano.

I think we lost Renato, but just to finish, the cost in real is similar to the previous year. So including the devaluation of the real, the cost in dollars, that is how we measure and how we express, slightly lower than what it was last year.

That makes sense. Thank you, Mariano.

Our next question comes from Julia Rizzo with Morgan Stanley. You can open your microphone.

Hello, good morning, everyone. Thank you for taking my question. I would like to touch on the outlook for sugar production in Brazil and sugar prices. A lot has been said about the dry weather and how that will affect the market. Can you explain what needs to happen? Because so far, sugar production and crushing across the board in Brazil has been really strong. How much yields or TRS has to decline in order to affect the expectation of sugar production in Brazil and therefore have an effect on global prices.

Thank you, Julia, for your question. Renato, are you back? Yes. Can you hear me? Yes, perfectly well.

Hi, Julia. We think that there are two main points that are going to affect cougar production. First is the yield. I think the yield is going to start to decline from now on in the center south of Brazil. Actually, the number that was just published from July was about 10% lower than the same period of last year. And the weather remains very dry. And there is a cold front that hit part of the sugarcane areas of Brazil, causing some damage. Something not very intense, but it's not helping the situation, which is already pressured because of the dry weather. the first part of the year, the yields were higher because there are a lot of Cannabisada that was crushed in 18 months sugarcane. That's not the case anymore. So now you're going to see a lot of reduction in yields from now on. And also the production mix. I think the mix is disappointing. Everyone is trying to maximize sugar. I think the initial expectation was that Brazil would reach 52% of sugar mix. Up to now, the mix is 49%. So probably the mix is going to finish the year close to 50%, 2% lower than initially thought, and it will lose in the mix around 2 million tons of sugar.

And Renato, on the dry weather, can you give me a color on where is this and when is it close to your region? Should we expect also Adequagro to face perhaps on this year or in 2025 a decline in crushing and yields as well?

Yes, we started the year with a very good outlook of sugarcane, mainly because of the rains that we received in the last quarter of last year. But then the weather changed and the weather became very, very dry. Actually, from January through to the end of July, we received 38% lower rains than the historical average. That's why our yields are under pressure right now. We expect this year we're going to finish the year with a yield slightly lower than last year, but we're going to crush more sugarcane because of the plantation and because of the third part sugarcane that we have been acquiring. For next year, I think it's too early to say anything. We still think that we are going to crush a little bit more than we are going to crush this year.

Okay, thank you very much. Congratulations.

Thank you.

Once again, if you have a question, please write it down in the Q&A session or click on Raise Hand for audio questions. Please hold while we poll for questions. This concludes today's question and answer session. At this time, I would like to turn the floor back to Mr. Mariano Bosch for any closing remarks.

Thank you for everyone to participate and hope to continue seeing you in our upcoming events.

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