Adecoagro S.A. (AGRO) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to AdecoAgro's 2026 Third Quarter Results Conference Call. Today with us, we have Mr. Mariano Bosch, CEO; Mr. Emilio Geco, CFO; Mr. Renato Jonquira Pereira, Sugar, Ethanol and Energy VP; and Mrs. Victoria Careo, Investor Relations Officer. We would like to inform you that this event is being recorded. Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Adecoaggro's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to the 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 Adecoagagro and could cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Mr. Mariano Bosch, CEO. Mr. Bosch, you may begin your conference.

Good afternoon, and thank you for joining Adecoagro's 9 Months 2026 Results Conference. Consolidated 9 months adjusted EBITDA reached an all-time high of $472 million. This is almost $100 million more than our previous record for this period. A year ago, we announced the acquisition of South America's largest urea plant. Today, it is fully integrated to our operations and continues to set production records. Consistent gains in efficiency, competitiveness and operational excellence, combined with our team's knowledge are generating these greater results. In Brazil, productivity continues to improve month-over-month. We are maximizing crushing across all our mills while capturing better sugar and ethanol prices. With Carapon mill now integrated into our cluster in Mato Grosso do Sul, we have additional industrial capacity and together with our continuous harvest model, it will enable us to crush excess cane and keep growing in volumes. By applying our know-how and best practices in the region, we are becoming the largest sugar and ethanol cluster in Brazil, and we believe the lowest cost producers, too. In food and agriculture, crop productivity reached a new quarterly record followed by an all-time high in October. Strong operational performance and better commercial results mainly from our daily consumer goods drove the improvement in the earnings. We are now in the middle of the planting season with very good conditions and favorable forecast pointing to good crop development. Following the strategic opportunity that we got with the Caraco mill, we still remain committed to achieving our year-end target in terms of deleveraging the company. To conclude, I would like to thank everyone at Adecoaggro. These achievements are the results of their daily commitment, hard work and constant drive to do better. Thanks also to our shareholders for their continued trust and support. Now I will let Emilio walk you through the numbers of this period.

Thank you, Mariano. Good afternoon, everyone. Let's turn to Slide 4, which presents a summary of our consolidated financial results. As a reminder, we are presenting our numbers on a pro forma basis, assuming our fertilizers business had been part of Adecoaggro since the beginning of 2025. We believe this provides a more meaningful year-over-year comparison. Gross sales totaled $591 million in the third quarter and $1.5 billion year-to-date. The year-over-year increase during both periods was mainly driven by a stronger performance in our fertilizers operations, which more than offset the lower revenues in Sugar, Ethanol and Energy due to lower sugar prices and sales volumes. While quarterly adjusted EBITDA remained in line with the prior year, the 9-month result reached a new all-time high, approaching the company's full year record. Strong urea sales drove the year-over-year growth in the fertilizers business, while improved domestic dairy performance supported a significant rebound in food and agriculture results. This performance, in turn, more than offset the softer results in Sugar, Ethanol and Energy, which I will discuss in a moment. Let's move to Slide 6 to review the financial and operational performance of the Sugar, Ethanol and Energy segment. First, I would like to remind you that we completed the acquisition of the Carapor mill in September 1, 2026. Since then, the mill has been fully integrated into our operations and consolidated into our results. Turning to our operational performance. We crushed 4.6 million tons of sugarcane during the quarter, slightly below the prior year as above-average rainfall in September reduced effective milling days. Cane productivity improved significantly with TRS per hectare increasing 31% during the quarter and 24% year-to-date, supported by favorable growing conditions. As a result, year-to-date crushing volumes reached 10.4 million tonnes, remaining above the prior year level and sustaining the growth trend observed since the beginning of 2026. Regarding our production mix, we continue to maximize crushing volumes while giving priority to the product offering the highest marginal contribution at any given time. Year-to-date, our production mix was 35% sugar and 65% ethanol. Production costs were negatively affected by the appreciation of the Brazilian real. Excluding this foreign exchange impact, year-to-date production costs in local currency remained in line with the prior year. Sales declined both during the quarter and year-to-date, primarily reflecting lower sugar prices and volumes, which more than offset higher ethanol volumes. During the third quarter, we accelerated ethanol sales to capitalize on the significant recovery in prices. This improvement was supported by tighter domestic supply and demand conditions and government measures that strengthened ethanol's competitiveness relative to gasoline. This was consistent with the strategy we implemented during the first half of the year. We sold ethanol inventories and daily production at peak prices ahead of the new harvest and subsequently rebuilt inventories to capture more favorable pricing opportunities later in the year. Overall, adjusted EBITDA totaled $101 million for the quarter and $120 million year-to-date. The year-over-year decline primarily reflected lower sales and the impact of lower Consecana prices on the mark-to-market valuation of our biological assets, particularly harvested sugarcane. Looking ahead, we continue to expect mid-teens growth in crushing volumes, supported by greater cane availability. Our continuous harvest model allows us to process any sugarcane left unharvested at year-end beginning in January. This position us to benefit from strong yields and potential increases in sugar and ethanol prices during Brazil's traditional interharvest period. Let's now turn to Slide 8 to discuss our fertilizers operations. We delivered another strong quarter, supported by solid operational execution and commercial performance. The plant continued to operate at high utilization rate, achieving a new monthly urea production record in August and new ammonia production records in both August and September. As a result, urea production increased 4% year-over-year during the quarter and 11% year-to-date, supporting further cost dilution. On the commercial front, urea demand strengthened ahead of the 2026, '27 planting season, supported by normal seasonality and lower prices following the peak recorded between March and May. Despite the sequential price decline, our average realized price for the first 9 months reached $561 per ton, that is $81 per ton above the same period of last year. This performance generated adjusted EBITDA of $109 million for the quarter, up 7% year-over-year and $283 million year-to-date, 65% above the first 9 months of 2025. Higher production volumes and operating efficiencies also contributed to a meaningful expansion in margins. In 2026, we expect the business to outperform prior years, supported by higher production, including new monthly records for both urea and ammonia in October and the higher prices captured during the first half of the year. Please turn to Slide 10 to review the performance of our Food and Agriculture segment. We completed the 2025-'26 harvest season with better-than-expected yields, producing more than 1.2 million tons of agricultural products. In dairy, productivity at our freeestols reached a new quarterly record, while meat processing volumes also increased. On the commercial front, our consumer brands continue to perform strongly in the domestic market, particularly in UHC milk. We also accelerated white rice sales as prices gradually recovered, contributing to higher sales during the quarter. Together, these operational and commercial improvements drove a significant recovery in food and agriculture results. Turning to the 2026-'27 season, planting is progressing with 57% of the planted area already seeded. We are increasing planted area by 3% year-over-year, mainly in rice and peanuts. We expect yields to be in line with or slightly above historical averages, supported by above-average rainfall during crop development and El Nino conditions expected to persist through the first quarter of 2027. In dairy, we expect mill processing volumes to continue growing, supported by new product launches across our consumer brands. Productivity at our freeestols also continues to improve, reaching an all-time monthly record of 41 liters per cow per day in October. Let's move to Slide 12 to review our capital allocation strategy. During the quarter, we completed the acquisition of Carapu Mill for approximately $136 million paid in cash at closing. Carapour has been fully integrated into our sugar, ethanol and energy cluster in Mato Grosso do Sul and is already proving accretive by processing surplus gain from Angelika and Ivinema. This should enable the mill to operate above its historical crushing levels from its first year under our ownership. We are also applying our operational best practices and gradually introducing our continuous harvest model to improve efficiency. Because Carapor is located in the same micro region as Angelica and Iillema, it benefits from the same competitive advantages. As we transition to this model, we expect to progressively increase effective milling hours. Including the acquisition, year-to-date, expansion CapEx totaled $602 million. The final payment for Profertil completed in the first quarter of 2026 remain our largest capital deployment. We also continue to invest in attractive organic growth opportunities across our businesses, including biomethane production in Brazil. Now let's turn to Slide 13 to review our debt profile. Net debt totaled $1.8 billion at the end of the quarter, while our pro forma net leverage ratio stood at 3.2x. The quarter-over-quarter increase in net debt was entirely attributable to the Carapour acquisition. Our debt levels also reflect seasonal working capital requirements and higher readily marketable inventories, consistent with the seasonality of our operations. Excluding these effects, net leverage would already be below the levels recorded in previous quarters. We expect leverage to decline as EBITDA generation increases, enabling us to reach our year-end target of approximately 2.5x. During and after the third quarter, we completed several liability management initiatives, including the redemption of our 2027 global notes in late October, further strengthening our debt profile. Following these transactions, long-term debt represents 78% of total debt and average maturity has been extended to 4.2 years. The currency composition of our debt remains closely aligned with our cash generation profile, helping to mitigate foreign exchange risk. We remain focused on deleveraging while maintaining a balanced debt structure and extending maturities. Finally, on November 19, we will pay the second $17.5 million installment of our annual cash dividend, equivalent to $0.12 per share. This payment will complete our 2026 shareholder distribution program. Thank you very much for your time. We will now open the call to questions.

[Operator Instructions] Our first question comes from Gustavo Triano -- it...

And my first question is on Carapa mill. And now that it's already part of your portfolio. Just wanted to have a clear road map for the ramp-up of the asset. You have discussed the 4.5 million tons of crushing for 2027 and potentially higher volumes over time. I just wanted to understand a little bit more the ramp-up curve for this asset and how quickly could Carapo converge towards the operational KPIs of your existing cluster? And also to understand a little bit more if the carryover impact of the crushing ramp-up throughout 2027 would automatically imply more volumes for 2028 onwards. That's my first question. And on the second one, still in the sugar and ethanol space and with the above-average rainfall levels that we're seeing recently in the Brazilian center South that is likely to postpone industry sugar compression towards next year. I just wanted to have an updated view on the commodity prices going forward for 2027, basically to understand if you understand that we are heading towards a more challenging year in terms of commodity prices.

Gustavo, thank you for your question. Before passing the word to Renato that will answer in detail, I would like to point out this Carapa mill. I think that the Carapa mill acquisition was something very important for us. It was a very attractive opportunity. We acquired a mill very near within our own plantations being really part of the cluster. And this mill has the capacity to mill between 5 million to 7 million tons that is similar to what we already mill in Ima. It even has more capacity on some parts of the system. So it is something really attractive for us. So if we only assume that we acquire this mill where we can mill 5 million tons with no problem at all with the cane that we already have in the cluster, we have excess cane in the cluster because this excess of rates that we have, and we have a very high productivity this year. So we are having excess of cane that we couldn't have mill. So we acquired this mill, if we assume 5 million tons, is less than $30 per ton -- this is something impressive in terms of the quality of the mill that we acquired for such a low price that includes everything. So we are really happy with this transaction. We think this was a great opportunity, and we are very comfortable that we will start showing the results as soon as we continue to me. So after making this quick clarification that I wanted to point out because it's something an extraordinary opportunity that presented in front of us this quarter, we couldn't have been so clear in our previous call. So that's why we wanted to point it out this time this great opportunity that we had by acquiring the Carapor mill. So making this quick clarification, I will ask Renato to go in detail to your question.

Okay. So as Mariano mentioned, Carapa is in the same micro region as Ana and Ivinhema. So it's part of the same cluster. So we see Carapa almost as an organic growth of the cluster. So we're going to adopt the same operational model that we have in Angeerca and Ivinhema. The equipment of Carapa have a lot of potential. The milling system is exactly the same as Ivinhema, which is crushing 6.5 million to 7 million tons. The sugar factor is the same size as Ivinhema and the distillery is even higher than -- bigger than Ivinhema. The steam generation is also bigger than I. So we think that Carapa has a lot of potential. Also, we think that we can adopt the best practice that we are -- that we have in our cluster to improve some important KPIs of Carapa. For example, the industrial efficiency, which is basically the sugar input and the sugar output transformed in either sugar or ethanol. We think that we can improve this KPI, which is very important. Also the use of time, we think that there are a lot of potential to improve the use of time. In other words, we think that we can have less mechanical problems in Carapa and crush more hours during the year. Also the energy consumption in Carapa is higher than in our cluster. And we think that with small adjustments, we can put it in the same level. And finally, in the agriculture area, we think that we can improve the sugar or the TRS per hectare of Carapa adopting the same way that we are doing in our cluster. Also, the Carapa team is very good. I think the integration was very, very good. It seems that they are working with us for a longer period of time. So we are very, very happy overall. And regarding our second part of the question, I think it's important to talk about 2026 before to get into 2027. I think the scenario is very positive, especially for ethanol. Today, the supply of ethanol is smaller than everybody was thinking as a consequence of the rains that the whole center South region is receiving. So the delay in crushing and also the lower TRS content decreased the ethanol output. On the other hand, the demand of ethanol is very high. Actually, the higher demand since 2019. The hydro demand per month is more than 2.3 billion liters of ethanol. The part rate at the pump is still in Sao Paulo, 62% so favoring ethanol consumption. If you take the inventories now is 14% lower than the same period of last year. So we think that the scenario is very tight. and prices should be high until -- at least until -- to finish the first quarter of next year. We are taking advantage of this scenario. The price is very good. And also, we are taking advantage of the subsidies that the government is giving. The subsidy is in the hydrous ethanol and is based in the sales of ethanol that we have during the period, and we are taking advantage of that. I think it's very important to mention that we don't have any commitment of anhydros with contracts of anhydrous. So we are maximizing hydros now to get all this benefit. So we believe that the beginning of next year, the scenario for ethanol is going to be really good. Once the season start, we think that the ethanol supply is going to increase. But although the amount of the sugarcane probably is going to be very high, that sugarcane first has to be crushed. I think Brazil has crushed 655 million just 1 year in the history in 2023. So it's not easy to crush all that cane. Also, we believe that the mix is going to be more sugar oriented. This year probably is going to finish around 46%. And next year, probably is going to be close to 50%. So part of the ethanol is going to be transformed in sugar. But the corn ethanol is going to increase. But if you put all those variables into equation, we think that the ethanol supply is going to increase around 3% only. We think that 3% more ethanol can be easily absorbed by the flat fuel cars. We could see this year how responsive the demand is to the part of the rate -- the part of the pump. So this ethanol, the excess of ethanol is going to be absorbed. In the case of sugar, -- we think that Brazil is the same situation of ethanol. So the 40 million tons that everybody was talking at the beginning of the season today is difficult to reach 37 million, 38 million tons. So the amount of sugar that Brazil is going to produce is lower. Also, this El Nino effect is causing a dry weather in other producer countries, especially in India. So India probably is going to produce less than it consumes this year. And for the next year, probably India is not going to increase the production because of the planting period that was very dry. So we think that the scenario is good for sugar as well...

The next question comes from Matteo Gan from UBS.

I want to -- my first question on pref -- rather my 2 questions on pref, but the first one on the potential expansion of the urea plant. So any updates around that on potential time line for an FID? That's my -- that's sort of the first point. But I also want to get your sense on how do you think that once your project potentially is running and then the other competitor is also producing urea in Argentina and Argentina becomes a net exporter of urea. I know that Brazil may be a target for sales, but price will need to absorb freight costs to Brazil. So I'm just curious on how you think that the outlook for urea production expansion looks in Argentina and how that could negatively impact prices, particularly domestic even if you have to export to Brazil. That's my first question. And then the second one is on prefect costs. It looks to us, if we're not seeing the wrong number here, that OpEx per ton for urea production is up 16% year-on-year. And then when I look into natural gas prices in Argentina, again, might be seeing the wrong reference here, but we see them up 5% in the same period. So the question is, what's driving this increase in urea production cost? And if you could just help us sort of understand what's the outlook from here and normalization from here just because we're seeing about $270 per ton cash cost per ton of urea for this quarter. And at this level, it looks like the normalized EBITDA for Perfetro will be slightly below what we were previously discussing once the acquisition was concluded. So just to get a sense of really how to think total cost for the urea plant there. Those are my 2 questions.

Okay. Thank you, Matteo, for your question. I'm going to address first your second question, just to clarify in terms of cost of production of urea that there were some misunderstandings here. Number one, it is important to look at it on an annual basis or at least on the 9-month basis because when we talk about quarter-by-quarter, sometimes there are some small specification. So going specifically for the 9 months we have 9 months '25, $262 per ton, while in '26, we have $237. So this is a 10% decrease in terms of cost of production. So we are having a lower cost of production this year than in the pro forma of the previous year. And this is around 10% lower cost of production. This also includes some additional expenses. So in reality, it's even lower than this number of $237 because we are including the sales of some other products on top of urea and that's the cost of production of all that when you make that type of calculation that includes ammonia, and E. So that is a small change that has to be adjusted. And then we are also including in the 237 million some growth and maintenance CapEx that are marginally contributing today to an increase in production. So -- and also some of the expenses that may be related to this potential expansion that is what you were also asking. So all in this, we are around 15% lower costs comparing to the previous year. This means some improvements in terms of gas prices, some improvements on logistics. So there are several improvements that are being happening during this year that makes this improvement in terms of the total cost of production up to now. Then going to your first question related to the expansion of the plant or this possibility of more than duplicating today's Pferin plant and the other projects that are here. What we believe and we believe since the very beginning when we analyze this business and when we acquired this Pferin business, we were always thinking on this increase of the plant of this project or potentially more than duplicating because what we see is that we can be the lowest cost producers in terms of urea to export within the region. We are going to be very competitive to go to Paranagua. Going to Paranagua is even cheaper than going to Rosario ports within Argentina -- so once Argentina completes its normalizations in terms of imports and exports, it's going to be equally cheaper or even cheaper going to Paranagua port in Brazil than to Rosario port. So for us, we are not looking at the plant in Argentina as only for the domestic market. Argentina has a possibility to sell within the region. The region still imports more than 8 million tons. And so it's 9 million tons what the region is importing today and the ability to make these 2 projects will only add 3.5 million tons. So they are still more than double to be a net importer in the region that is how we really look at this potential business. So we don't see any risk if the 2 projects are being completed. We think that we can continue to deliver the kind of results that we are delivering today. That's why we are so optimistic. And we are working hard on developing all the engineering and all the necessary needs to reach the FID that we hope to reach to it within next year or some point of next year. But we are working hard on that to happen.

Okay. And just one clarification on the urea cost. Back in December, I think we were discussing normalized mid-cycle EBITDA for Pfetro of around $300 million per year. Do you think that that's still reasonable compared to what you're seeing today? I know that prices can move urea prices can move, but in general, that's the mid-cycle EBITDA that you can expect for Pfetro.

Yes. And as I was mentioning before, we are finding more and more opportunities to continue improving. So we can even have better numbers than that. We are certainly going to close this year on a higher number. This is affected by only 2 months of higher prices than normal because March, April and a portion of May when the prices of urea were out of the historical numbers. Then the rest of the year -- during the rest of the year, we had historical numbers when you look at the CFR urea price in Brazil.

Our next question comes from Guilherme Palais for Santander...

Just a follow-up on Matt's question. Of course, you have a great opportunity there on the fertilizer market in Brazil and the Argentina consumption. I just want to try to drill down a bit on the costs between natural gas and other costs. And if you could just explain a bit on a high level, you mentioned a bit the benefits that you guys are seeing because you are reaching the record production levels. So which of the lines and fixed costs are you being able to...

Guilherme, we lost you.

I just want to understand, you mentioned that you guys are putting out record production numbers for the fertilizer business. I'm just trying to understand a bit how much is fixed versus variable cost there and how we can model a bit the cost curve going forward as you guys continue to deliver those lower costs year-over-year? And what is the level that we should be looking at long term?

Okay. In terms of fixed cost or variable cost, probably 70% to 75% are variable costs. But within the variable cost, you can also work on them. The gas is the #1 variable cost, and there are some opportunities to continue improving this gas pricing and especially gas pricing at the level of the plant, including all the transportation of that. So that is something that we do expect to continue to improve. And then on the logistics in general, have been improved and there are still some room for improvement while Argentina continues to normalize.

That makes sense. But just drilling down a bit on that, if you could just share with this such high level of production, how much of the gas today is coming from the fixed cost that you guys have and how much is variable? And have you already been able to manage a bit those spot prices of natural gas and how are they doing now?

Yes, sure. Around 80% or 85% is a fixed price. And then there is still a 20% to 15% variable price that you can take opportunity of cheaper gas prices at these moments of the year.

The next question comes from Gabriel Baja from...

I have 2 from my end here. The first one, the discussion about ethanol is quite interesting at this point, right? You have the subsidy that should be renewed by next month. We are seeing the hydrous ethanol in a really tight market today when you take a look at the inventory levels, demand is peaking on the hydros. So my question is how do you operate this market, right, in terms of -- mainly in terms of the commercialization strategy here from now on until next crop season. I want to hear a little bit more about in terms of mix. You mentioned that you don't have contracts on hydros, but on the other side, we are seeing a more tight market on this side. So you have oil price decreasing and crack spread normalizing. So it's an interesting moment to understand a little bit more on the commercialization side from you guys. The second one, back to Cap discussion in the end of this crop season, we still see some here in order to crush the rest of the sugarcane. We understand that you have this continuity on the crushing process during the end of the year. And you have this spare capacity on Cap, right? So -- given the fact that you have more sugarcane and you have, I would say, if you correct right here, you are reaching the maximum capacity of the legacy plants that you have, Cap could be one of the ways to debottleneck this higher productivity and high production of sugarcane. So if you could give us more color about that. And in terms of cost, if this should be a net positive or a net negative in a cost perspective for the average cost for the company, this could help us a lot here to understand the trend of the cost and then.

Thank you, Gabriel, for your color. In a quick answer, we are selling as much ethanol as possible. We are selling all our ethanol during this period of time. And also -- and the second question is a clear net positive. Then Renato can give you some more color on these 2 questions. Renato?

Okay. So regarding the ethanol question, we are producing hydrous ethanol now to take advantage of the subsidy. And we think that in the first quarter of next year that we're going to be crushing in our continuous harvest module, we're going to be producing hydros. We have the equipment to produce anhydrous in all our mills. So we are ready to change the mix to onhydros and to capture this price. We think that the hydro is going to increase also because the gasoline consumption is going to increase because hydro ethanol is going to move towards the 7%. Regarding the second part of your question, I think it's important to mention that Carapo, we are going to have 2 months of inter harvest because Capo is not ready to do the continuous harvest. So we are going to start crushing in Cap in March 1. And that's why we are considering that Carapor is going to crush between 4 million and 5 million tons of sugarcane. In our continuous harvest model, we don't see those can as a kind of bizada. So in this model, at some moments when the weather is wet and it's rainy and we are delayed in the crushing, we end up crushing that sugarcane with more months. But in other moments, when the weather is drier, we anticipate that the crushing of those sugarcane, sometimes with less than 12 months. So we expect at some time during the year, the weather is going to give a chance to put the sugarcane in the right age to be crushed.