Adecoagro S.A. (AGRO) Earnings Call Transcript

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro's 2026 Second Quarter Results Conference Call. Today with us, we have Mr. Mariano Bosch, CEO; Mr. Emilio Gnecco, CFO; Mr. Renato Junqueira Pereira, Sugar, Ethanol and Energy VP; and Ms. Victoria Cabello, investor Relations Officer. We would like to inform you that this event is being recorded. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Adecoagro'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 Adecoagro 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 morning, and thank you for joining Adecoagro's First half 2026 Results Conference. Consolidated adjusted EBITDA marked new records, reaching $258 million year-to-date and EUR 173 million during the second quarter, reflecting the earnings potential and scale that our well-diversified agroidustrial platform now has. In Fertilizers, stronger operational performance during the quarter resulted in higher production volumes, while higher prices and cost efficiencies supported further margin expansion. Even higher-than-expected prices during the first half, we expect the annual performance from this segment to be above our initial projections. In Brazil, The sugarcane plantation is in excellent conditions. The investments and work done over the years to improve can productivity are paying off as weather conditions have normalized. Sugarcane availability is now driving the crushing volume growth. And this is also one of the reasons why we view the acquisition of Carapa Mill as highly accretive. We believe this asset will enable us to organically expand our sugar and ethanol operations by milling the surplus came that our cluster currently has, while further strengthening our presence in the region. As we capture the operational synergies, we see potential to unlock value by increasing the crushing and consequently, reinforcing our position among the lowest cost producers in the industry. Given its earnings potential, this expansion does not alter our deleveraging progress nor our target net debt to EBITDA for the full year. In Food and Agriculture, stronger productivity enabled higher cost dilution. Bromine production has improved, supporting higher processed volume in our industries. As the new crop is being commercialized, margins should improve, supported by a more efficient cost structure. To conclude, I would like to express my gratitude to all the teams in Adecoagro. It is because of their commitment that we continue to achieve new milestones despite the different commodity cycles, which we navigate. Thanks to our shareholders for their continued support. And now I will let Emilio walk you through the numbers of the period.

Thank you, Mariano. Good morning, everyone. Please now turn to Page 4 with 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 Adecoagro since the beginning of 2025. We believe this provides a more meaningful year-over-year comparisons. Gross sales totaled $535 million during the second quarter. While on an accumulated basis, they reached $928 million. Despite higher revenues in our Fertilizers segment, overall revenues remain in line across both periods, reflecting mixed prices and volume dynamics across our product portfolio. Adjusted EBITDA set new high records. The main driver was the strong performance of our Fertilizers business, which benefited from higher production, stronger pricing and operational efficiencies. Such performance more than compensated for the softer results in Sugar, Ethanol and Energy and Food and Agriculture businesses, which I'll discuss in a moment. Let's move to Slide 6 and review the financial and operational performance of the Sugar, Ethanol and Energy segment. Despite experiencing above-average rainfall, particularly in May, we crossed 3.5 million tonnes of gain during the quarter, up 3% compared to the same period of last year. This continues the positive trend we've seen since the start of the year. Cane yields have recovered, thanks to the better moisture conditions. Although TRS levels remained below last year's, they have been improving steadily throughout the year. In terms of product mix, we continue to maximize ethanol production, given its attractive premium of sugar. As a result, we reached 78% ethanol mix year-to-date. By comparison, during the first half of 2025, we maximized sugar production. This shift highlights one of the key advantages of our industrial assets, the flexibility to quickly change production towards the product offering the highest marginal contribution. On the cost side, production costs were negatively impacted by the appreciation of the Brazilian real. Excluding the FX effect, our year-to-date production costs in local currency remained in line with the previous year. Turning to sales. The decline we saw this quarter was mainly driven by lower sugar prices and lower sugar volumes sold, reflecting the change in our production mix. For ethanol, lower sales volumes were actually part of our commercial strategy. Following the sharp decline in domestic ethanol prices caused by higher market supply, we decided to start building inventories rather than selling at current market prices. As a result, we finished the quarter with about 41% of our year-to-date ethanol production stored in inventory, positioning us to capture stronger margins once prices recover. This follows the strategy we implemented during the first quarter when we sold inventories and current production, while prices were at their peak, ahead of the new harvest. Overall, adjusted EBITDA reached $53 million during the quarter and $94 million year-to-date. The decline compared to last year reflects lower sales as well as lower CONSECANA prices in the mark-to-market valuation of our biological assets, particularly harvested cane. Looking ahead, crushing is progressing as planned, and we are still on track to achieve our full year target. We continue to expect low double-digit growth in crushing volumes this year, supported by greater cane availability. Now let's turn to Slide 8 to discuss our Fertilizers operations. Urea production increased 22% year-over-year, driven by higher plant utilization and importantly, downtime during the quarter. As a result, year-to-date, urea production reached 617,000 tonnes, remaining well above last year's level which was impacted by 31 days of downtime due to adverse weather conditions that disrupted gas supply as discussed on previous calls. On the commercial side, results benefited from a significant increase in international urea prices. Following the escalation of the conflict in the Middle East, our region responsible for roughly 30% of global urea trade, prices reached nearly $800 per tonne during the quarter. As we executed sales throughout the period, we were able to progressively capture the research in prices. Accordingly, adjusted EBITDA more than doubled both in the quarter and on a year-to-date basis. In addition, higher production volumes, together with operational efficiencies, drove a meaningful expansion in margins. Although urea prices have moderated from the peaks reached in April and May, we still expect full year EBITDA from this segment to be above our original projections. This outlook is supported by higher prices captured in the first half of the year while most of our cost structure remain fixed. Please move to Page 10, where we describe the performance of our Food and Agriculture segment. As of the end of July, we have 92% of the planted area, achieving yields above the prior campaign and producing more than 1.1 million tonnes of crops. We expect to complete the harvest season during this month and have already begun planting activities of our winter crops for the next season. In dairy, processing volumes increased compared to last year, driven by higher raw mill production at our feedstock facilities due to better car productivity. Looking at financial performance, year-to-date results still reflect lower commodity prices across much of our portfolio, along with higher costs in U.S. dollar terms. That said, if we focus on the quarter itself, both revenues and adjusted EBITDA improved year-over-year, supported by higher production volumes and a gradual recovery in margins as we begin sales of the new harvest. We expect margins to continue improving over the next few quarters as the benefits of our cost reduction initiatives become more visible. In dairy, we also expect to continue growing processed milk volumes supported by the launch of new products under our consumer brands. Let's move to Slide 12 and review our capital allocation strategy, starting with expansion CapEx. Year-to-date, our largest capital deployment was the final payment of approximately $400 million related to the acquisition of Profertil, which was completed during the previous quarter. At the same time, we continued investing in a number of attractive organic growth opportunities across our businesses. These investments include the expansion of our sugarcane plantations and biomethane operations in Brazil as well as additional agricultural machinery and new cheese packaging line at our Morterosterry facility. Before moving on, I would like to highlight that these figures do not include the acquisition of Carapo Mill, which remains subject to customary closing conditions. We expect the transaction to close in the coming weeks with the purchase price paid in cash at closing. Given the estimated earnings contribution from the asset, we do not expect the acquisition to affect our deleveraging targets for year-end. Now let's move to Page 13, where we present our debt profile. As we typically experience at this point of the year, net debt tends to peak due to the seasonal working capital requirements associated with our agricultural operations. If we exclude that seasonal effect as well as the $58 million increase in readily marketable inventories during the quarter, net debt would already be below 2025 year-end levels. On a pro forma basis, net leverage stood at 3x, which remains consistent with our deleveraging path and reflects the stronger earnings generation we are seeing across the operations, despite the seasonality in cash needs and our commercial strategy to hold inventories for some of our products in anticipation of better pricing opportunities. Looking forward, we continue to expect leverage to decline as EBITDA generation increases. On the liquidity side, our ratio improved to 1.9x compared to 1.2x in the previous quarter, demonstrating our ability to comfortably meet short-term obligations. Please note that most of our debt remains long term and that its currency composition is closely aligned with our revenue profile, helping reduce foreign exchange risk. Finally, regarding shareholder returns, the first installment of our annual cash dividend totaling $17.5 million was paid on May 19, equivalent to $0.12 per share. The second installment in the same amount will be paid in November, resulting in a total annual cash dividend of $35 million. Thank you very much for your time. We will now open the call to questions.

[Operator Instructions] Our first question comes from Gustavo Troyano with Itau BBA.

It's actually on pro and more specifically on the mismatch between production figures in the quarter and sales volumes that you reported for this quarter as well? And basically, I just wanted to hear from you what could be attributed to the usual seasonality of sales volumes and what could relate to maybe one-offs in the quarter, potentially driven by urea price spike or something like that. And still on this point, maybe after the first half, if we should expect that Adecoagro's sales volumes for the full year to reach the 1.3 million tonnes for the full year concentrating volumes in the second half or if there could be some downward adjustments to sales volumes after what happened throughout the first half of the year.

Gustavo, thank you very much for your question. I think this helps for a whole clarification of how we sell the urea. We produced 1.3 million tonnes per year. So we are going to sell 1.3 million tonnes in the whole year. Argentina consumes 2.5 million tonnes, so there is no way that we cannot sell the 1.3 million tonnes. So 1.3 million tonnes is for sure something we will always be selling. And we could be selling all what we produce every month, and that is easily easy to do it. But we have a strategy where usually and in general, over the years during September, October and November is the maximum consumption of the urea from producers. So in general, that would be where the higher prices in the domestic market of Argentina, we can find. So we try to concentrate more sales in that specific part. That is for the general years. This year, in particular, as you mentioned, this peak because of the world during March and April. So in April, we tried to maximize the peak. That's why we are selling more than what we originally projected in the first half. So what you can see there is the first half, we sell more or less the average that has been sold in the previous years. But in this specific year, we were pushing to sell more. But in June, you may not remember, but in June, the price of urea went down as far as lower than the previous year, so lower than July and August. So during June, we had the lowest price of urea. That's why in June, in particular, we decided not to push on the sales as we were pushing in April and May on what we had produced. So that is specifically why this particular month or this particular quarter, you are not selling all the production being sold. And we are happy with that decision because in June, the price was lower than today's prices or July and August. So we have more inventory today to be sold during -- at a higher price. Of course, we would have sold 100% in April. That is the maximum. But in agri, we push and we try to sell as much as possible, but we couldn't. This is a spot price that every week is being sold, and that's how urea commercializes in general. So that is important to make that specific clarification, and thank you for the question.

Our next question comes from Matheus Enfeldt with UBS.

My first question on sugar and ethanol. You had previous calls, mentioned the expectation of a drop in cash cost. -- of 10% to 15%, if I'm not wrong. If you could provide any updates around that level of cost efficiency or cost improvements for this crop. If you still think that, that number is reasonable when you're looking to the entire crop. That's my first question. And then the second one on the acquisition of the Cana Mill. I understand there's potential synergies to capture higher crushing -- my question is, what's the excess capacity or excess sugarcane that you currently have? And how do you think -- or how do you anticipate that cost move with a higher or a larger radios were sourcing once you end that plant? And if you could sort of help us get a sense around that. And then just to finalize on that, on -- what's a reasonable outlook for crushing for that mill for '27? If it's already possible for you to reach 4 million, 4.5 million tonnes above the 3.5 the mill crushed last season. So those are my questions.

Matheus, thank you for the question. On the projection of the yield of the milling -- the full milling for Carapo on 2027. We don't give that guidance, and we want to close first and then we will explain more details on Carapo. On the rest of the questions, including some of the synergy from Carapo, Renato can take the cost and how the cost can be impacted with Carapo and what are the synergies also with Carapo. Renato?

Matheus, thank you for your question. So as it was mentioned, we see Carapa extension of our [indiscernible]. So we are going to adopt the same operational model there. And we have the same competitive advantage. So our plan in the future is to do the continuous harvest. We're going to take advantage of the high production flexibility that Carapa also have the high cogeneration potential, the EMES tax rebate, that is exactly the same as our mills in Mato Grosso. And we think that Carapa has a potential to increase the effective crushing a lot, almost double the crushing. This is because the capacity of Carapo is very similar to the capacity of Ivinhema. So if you consider the milling capacity the sugar production capacity, ethanol capacity is very similar to Angelica and EVM mills. We also think that we have a lot of opportunities to improve some and to reach the same area as you have in Mato Grosso. For example, industrial efficiency. We think we have 2% higher than Carapa. The use of time, that is up kilowatts of energy per tonnes of cane crushed, we figure can improve and also some improvements in agriculture, both in yields and TRS. And to finalize the synergies, we think that we have a lot of synergies related to G&A. So we are going to keep the same structure that we wouldn't have to -- also to use this in Carapo. And we are going also to benefit from the logistic then commercial assets. So we're going to take advantage of the tanks that Carapa has warehouse. So I think there are a lot of synergy to -- that we are going to get in the next years. Of course, part of the sugarcane, as Mariano mentioned, from the cluster, we are going to send to be crossing in Carapa. Regarding the other part of your question, the cost, I think it's important to say that quarterly costs might have some temporary distortion countered by cost allocation in industrial seasonality. So it's our better to analyze the costs based on the year cost. But -- even with this consideration, we think that is still possible to reach the 10% reduction cost compared to last year. I think this is explained first by the cost dilution. We plan to crush 10% -- approximately 10% more than we crushed last year. We still have plenty of time to do it. Of course, it depends on the weather. But at this point, it's still possible. So this has an extra cost dilution. The leasing cost is much lower because of the Consecana price. The head count has been reduced. This is because of some efficiencies that we have been obtaining, especially because of the use of new technologies such as true roll harvest machines, Gruners. So we have decreased the number of harvesting fronts, so reducing the number of people working on those fronts. And this is more than enough to offset some diesel and fertilizer increase in costs. So we think it's still possible to have this 10% reduction.

[Operator Instructions] Our next question comes from Pedro Gamma with Citi.

So on my side, I have 2 questions in the Fertilizers segment. In the past, the management highlighted that the likely expansion of the perpetual plant is a key growth avenue However, during the previous weeks and months a major Argentinian competitor in the gas sector announced investment in a new greenfield urea plant in the same region as perpetual. Building on that, I'd like to ask about 2 questions. First, how does the perpetual current cash cost restriction compared to this peer that is vertically integrated in gas production. [Audio Gap] prior to expansion is a brownfield project. Should this historically be faster to implement. And what's -- what would be the key triggers or market conditions required for you to make a final investment decision? Is that a strategic urgency to bring this new capacity online before your competitor, thereby capturing a first-mover advantage in the domestic market, which usually has higher margin than exports to Brazil, for example? Or could this expansion be postponed in light of the company focus to deleverage? I believe there is the main points.

Thank you, Pedro, for your question. Very important. Number one is South America consumes 10 million tonnes consumes -- no, imports 10 million tonnes of urea, 10 million tonnes. We produced 1.3 million tonnes, and the announcement is to produce 2.1 million tonnes. So there are still a lot of need of urea in the whole region. This announcement is to produce urea in 4 or 5 years from now. So they are still a lot to go. When you ask to compare the cost of production from one system to the other, still a lot to understand on what's the other costs. We know exactly what are our costs, but there are a lot of costs on the other side that still need to be understood. In terms of gas and the cost of gas, the gas is a very transparent market. And we have to renew our contracts, as we said before, and we expect those contracts to be better in terms of prices than what they are today. And we are having offers of gas way cheaper than today. There are still a lot of gas available in the region. So if we don't see any disadvantage in buying gas in the region to the competitors or any other competitor there in the region. Argentina, as we've been explaining for many times, will be a huge exporter of gas. So we are always going to be a buyer of gas at the cost of the export parity, as we've been always saying, that is going to be very competitive. So we still believe that we are going to continue to be the lower crop producer. And when you think on the selling on the domestic market or on the export, depending on where because with the logistics and the port that we have in by blanca, we are very competitive to go to Brazil as competitive as to go to Porto San Martin that are the northern ports in Argentina. So the differences between the domestic and the export market when we think on the Brazilian market is not going to be really relevant. So that is to understand what the impact of a new plant is in the whole 10 million tonnes that the region is importing. And then going to our own project that you were asking, we continue to understand, analyze calling deep to the engineering work on the engineering on our brownfield project. And of course, we have a lot of benefits because of having a brownfield project there. We know exactly where the location, the plant and where it's going to be behind the existing one. There are a lot of synergies with our existing assets. So we are still very keen on that project. We are very interested on continue to understand and also continue to understand what is the real cost of producing it of building the plant and how is the best way to produce this plant or to build this plant in order to continue to be the low crop producer and there is where we are focusing and how efficient is that we can build this new plant that, of course, is a relevant investment.

Our next question comes from Lucas Ferreira with JPMorgan.

I have 2 questions. The first one on the commercialization strategy for sugar and ethanol. And if you can talk about, in your view, what are the reasons for ethanol prices to be extremely low, right, at this point and how the company is reacting to that? I guess, looking at your numbers, you're carrying a large amount of inventories to be sold later in the crop. So how much of a capacity you have to carry, if that's still the strategy that you guys are ruling for the second half of the year? And then on the sugar prices, if this recent rally in prices drives you guys to accelerate selling? And if this is already levels that you think are good enough to do a major acceleration of selling there in the market? And then if I may ask a second question, more on the Argentina farming side, a bit of your outlook considering that we have this strong [indiscernible] coming in, the business has been more challenging in the last few years. how much of a recovery, let's say, normal -- what you think is sort of a baseline yields for the crops and potential yields for the crop? So how much of that gap closure we should see, assuming that Enel will mostly support rainfall, right, in the country?

Thank you, Lucas, for your question. I'm going to ask Renato to answer the commercialization, sugar and ethanol and our strategy with sugar now.