PROFERTIL S.A. (AGRO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro's conference call. Today with us, we have Mr. Juan Sartori, Executive Chairman and Tether's Head of Business Initiatives; Mr. Mariano Bosch, CEO; Mr. Emilio Gnecco, CFO; and Mrs. 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 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 today's conference call. We are pleased to announce a new and very important step in Adecoagro's growth journey. The agreement to acquire a 50% stake in Profertil, the largest producer of granular urea in South America. Let me walk you through our strategic rationale behind this transaction. Please turn to Slide 3. As farmers, we understand the critical role of nitrogen fertilizer in agricultural production with urea being the most widely used. South America, in particular, Argentina, Brazil, Uruguay and Paraguay, has vast extensions of land dedicated to crop production. However, the region's urea production falls short of meeting demand, resulting in a structural deficit that makes it a net importer of approximately 10 million tons per year. Gas is the main input in the production of urea. Argentina is located in one of the largest natural gas basins in the world. And with the development of Vaca Muerta, it is becoming a significant gas exporter. Profertil is strategically located with excellent access to Vaca Muerta's natural gas. Producing urea is an efficient and industrialized way of exporting gas. In addition, its state-of-the-art facility is located in the Port of Bahía Blanca province of Buenos Aires, one of the best ports in Argentina with direct access to regional markets. We see in Profertil the same philosophy that we have in Adecoagro of being the lowest cost producers by producing each product in its optimal location. This is about creating long-term value. Profertil is one of the best companies in Argentina, run by a highly experienced management team with a proven track record. By acquiring a 50% stake, we will become key producers of a critical input for regional agriculture while securing exposure to a business with attractive fundamentals and consistent cash generation. For Adecoagro, this transaction diversifies its portfolio, contributing to reducing volatility and reinforcing the resilience of its results. We are positioning Adecoagro to deliver even stronger growth and returns for our shareholders. In the next slide, I would like to focus on the structure of the deal. Profertil is a 50-50 joint venture between YPF, Argentina's largest oil and gas producer, and Nutrien, a global provider of crop inputs and services. Nutrien's 50% stake was up for sale as they have undergone a broader restructuring in Latin America. We saw this as an exciting opportunity. We partnered with ACA, an Argentine cooperative with whom we have a great and long-standing relationship. They are a leading operator in the commercialization of grains, oilseeds and fertilizers in the country. Through a partnership, 80% Adecoagro and 20% ACA, we signed an agreement to acquire Nutrien's stake. The purchase price is approximately $600 million. We believe we have a great complementarity with YPF and are excited to start working together. We expect the transaction to be completed before the end of 2025, subject to customary closing conditions, including YPF's 90-day right of first refusal. On Slide #5, you can see the location of Profertil's assets. Profertil's production complex and dispatch center is located in Bahía Blanca. It has a production capacity of approximately 1.3 million tons of urea, representing 60% of domestic consumption in Argentina. The Bahía Blanca complex is supported by storage facilities spread across the country, making distribution and logistics more efficient. Moving on Slide #6, we can see in numbers the opportunity that lies ahead. Argentina has consistently consumed more urea than its production capacity. Last year, the country produced 1.3 million tons of urea and consumed 2.3 million tons, needing imports to cover the shortfall. And as mentioned earlier, Argentina has vast reserves of natural gas, which is the main input in urea production. Gas accounts for 60% of the production cost and having access to a competitively priced gas is a significant advantage. Market opportunity we see is not limited to Argentina or South America, but extends globally as we illustrated in Slide #7. Studies show that demand for ammonia will grow by 12 million to 14 million tons. Even with new facilities, there will be a gap of approximately 7 million tons. We believe Argentina and Profertil can play a significant role in addressing this demand. Before concluding, on Slide #8, we can see Profertil's financial performance over the past years. This is a company that is healthy and has been generating consistent results. The 5-year average over the period 2020 to 2024 amounted to $750 million in sales and $390 million in EBITDA, offering an attractive EBITDA margin. This reflects the quality of the assets, its unique positioning and the strong management team leading the way. We are excited to join them and help take Profertil to the next stage of development. Now I will pass the word to Juan Sartori, Head of Business Initiatives at Tether, and Adecoagro's Chairman of the Board of Directors, representing Tether, our largest shareholder.

Thank you, Mariano. Good morning, everyone. At Tether, we are excited to support Adecoagro in this growth strategy. Profertil is a best-in-class company essential to Argentina and South America's agricultural production chain. We believe its integration will significantly enhance Adecoagro's growth platform by gaining more exposure to sustainable real assets that create long-term value. At Tether, our mission is to build sustainable and resilient infrastructure that benefits communities and drives growth. Adecoagro's proven ability to operate and integrate complex agricultural and energy assets with efficiency and discipline is fully aligned with this vision. We are confident that by combining Adecoagro's operational excellence with Profertil's leadership in urea production, the company will strengthen its role as a key partner for farmers and for food security in the region. As a long-term shareholder, Tether is committed to providing support, financial and strategic, to help Adecoagro capture these opportunities while maintaining a strong balance sheet, maximizing value for all stakeholders. We look forward to working with the Board, management team and investor community on this journey. Together, we will drive innovation, foster sustainable growth and create lasting value for our shareholders and the communities we serve. Thank you, and we will now open the call to questions.

[Operator Instructions] Our first question comes from Matheus Enfeldt with UBS.

So I have 2 questions here. The first one is on the process for allocating capital for Adecoagro from now. If you could just walk us through like what are expectations in terms of target IRR? If you think that owning minority stakes or co-controlling stakes and partnerships as this one is sort of the baseline for capital allocation here? And if you still think there is room for capital allocation from where we are? And then my second question is on leverage. I mean, leverage in my numbers, and I could be wrong here, could move up to 3x, 3.0x, 3.5x net debt-to-EBITDA. How do you see this developing? And if this is a level that you're comfortable with? Or if you could see more investments and pushing leverage perhaps a bit more with new investments on capital allocation? And also on that, there was a commentary that we repeated from a previous call that Tether could support Adecoagro also financially. What would be a potential trigger for a support from Tether -- financial support? That's it.

Matheus, thank you for your questions. I will start with Emilio answering on the leverage of the company and how we see this and where we are on the whole financing of the operation.

Okay. Thank you, Matheus, for the question. First of all, well, we have already secured the financing of the transaction. We have more than $1 billion in credit lines approved by different financial institutions. Within those credit lines, Rabobank, who also acted as financial adviser in this transaction, has offered us a long-term facility with very attractive terms to fully finance the acquisition. If we think on our projections and including the pro forma of Profertil, we're going to probably end the year in a roughly 3x net debt/EBITDA ratio. As we always mentioned, it's above what we believe or we feel comfortable in having in the long run, which is a 2x net debt/EBITDA ratio. However, of course, we will be revising our capital allocation programs going forward to execute this transaction. And we will be informing the whole market about our plans to bring it down to the desired levels. But as we always said, when there's an opportunity like this, we might go above the 2x EBITDA that we always mentioned as our policy.

On regards to the first part of your question, whether we are going to be investors of minority stakes, all that, this has a clear fit, and as we just explained, with Adecoagro as a whole, we are a co-controller of the operation, we are not a minority, so we have a clear co-control in this potential transaction. And in this particular case, we think that we have a good complementarity with our partner. And the IRR targets are above 20%, and that's how we've been looking at the targets. And as we've explained many times, into a new sector, into a new -- see something that is better than our existing business lines. And this particular case and this particularly, we saw it as, at the level of price, even more attractive than the growth that we have within our existing business segments. That's the reason why we decided to invest in this opportunity, and we are very excited with this. But the concept of how we think in terms of capital allocation is exactly the same that we've been explaining in the last 10 years or more since we are a public company, and respect the support of the shareholder. I don't know, Juan, if you want to complement something on what we just mentioned.

Yes. Matheus, first, quickly on the capital allocation model. This is a transaction where precisely you can decide where you want to be in the curve of IRR versus leverage, because in theory, we have 100% leverage available at good terms and IRR goes from unlevered around 20% to, in theory, infinite IRR as you put the financing that's available to the company. So we'll always try to do the best IRR possible, managing the risk profile of the company for any volatility. There's a third factor that improves financially in this acquisition, which is that inputs are negatively correlated with our outputs. Generally, our whole agricultural production model has a risk of higher cost of inputs, mainly higher cost of oil, which is correlated with urea. So I think that as you see the whole allocation that this company and the return profile that it brings to the company, you'll see a model that is much less risky with a much higher IRR and very complementary. So in this case, we are very comfortable with the way it's being financed and it's available to the company. Now we always said that Tether supports this acquisition. And in the future, if there's need of more capital, because there's belief that we want to reduce the leverage ratio for whatever reason, we obviously will be supporting the company in that regard. So we are still 100% in that line.

Our next question comes from Lucas Ferreira with JPMorgan.

Can you hear me? Okay. My first question is just to confirm, if you can, discuss a little bit the multiple you're paying for this transaction, if the $600 million includes all the debt. And if you have any sense of what EBITDA to expect for next year, if it's similar to the previous year that you just disclosed in the presentation, would be getting to something near 4x EBITDA, if that's a number you can disclose? And I just also wanted to understand how the contract with both YPF and the Asociación will work in terms of if you still have the right to keep on acquiring stakes and how you see the relationship there with YPF, if it's obviously strategically important or if you think in the future, you could still be acquiring additional stakes in the company?

Lucas, thank you for your question. On regards of the multiple, you can see in the presentation the past EBITDA of the company, so you can make whatever the calculation you want. We can assume $300 million of EBITDA, something normalized. You can assume, I think, the $200 million that is in 2025 in the public projections that the company has are below because of certain specific things of this particular year. But if you can assume $300 million, that's something that you can think about if the total value is 1.2, we are talking about 4x EBITDA. That could be a way of looking at the pricing of this acquisition. And then on the second part of your question -- and then on the co-control of the company and the shareholder agreement, we cannot comment much, but it's a clear co-control on the company, and we don't know what the YPF is willing to do, but we believe we are very -- there is a very good complementarity between YPF and us, and within us is Adecoagro and ACA, and so that the complementarity is even better when we consider ourselves, including the co-op with whom we have an excellent relationship.

Yes. And just to complement on Mariano's comment, we will be fully controlling the partnership with ACA, and we will be stepping in the shoes of Nutrien in the existing shareholders agreement of Profertil.

Our next question comes from Gustavo Troyano with Itau BBA.

Actually, there's only one point I'd like to discuss with you guys and it relates to further growth opportunities. We understand that maybe now Adecoagro will go through a moment of deleveraging maybe in the short term. But after that, I'm thinking about like the next steps that you guys are intending to do inside Adecoagro's platforms in terms of growth. How should we expect these further moves performing, right? So just thinking out loud here, if you guys think it's feasible to expand Adecoagro's portfolio to other businesses, other segments that we are not seeing in the current Adecoagro platform today, so besides sugar and ethanol forming or fertilizers here. Just to understand a little bit more, what's the mindset behind this expansion towards new segments that you guys see for this M&A and for further opportunities that might arise after you deleverage Adecoagro to a more comfortable level as you always used to operate.

Gustavo, thank you for your question. I think we always have to take into account our capital allocation policy. We will always be looking for attractive returns, and that's the only case where we can move outside our existing segments. We've always been very disciplined in our capital allocation policy. So the returns and being the low-cost producers long term is where we are always going to be focusing ourselves. So this is something very particular, very specific, and we are very excited with this potential transaction, but I don't see other things coming in line if we are now focusing on this specific transaction. And of course, we always -- we never give guidance on what are the future plans.

[Operator Instructions] Our next question comes from Thiago Duarte with BTG.

A couple of follow-up questions on previously discussed topics. The first one, Mariano, just to try to figure out what's the level of normalized or mid-cycle EBITDA you believe Profertil is capable of operating? You mentioned this year's around $200 million is probably below that, but we also saw a few years ago over $700 million EBITDA. So just your best sense of what the mid-cycle EBITDA generation could be for the company? And the second follow-up is with regards to -- it's actually related to the previous question, which is in regards to should we think of Adecoagro's platform as changing into something that, "okay, I'm ready to do and engage into opportunistic deals as long as they are related to low-cost producing companies of whatever they produce, and they are related to agriculture at some level". So just want to think whether you guys are ready to engage into future deals, whether opportunities like this one show up even though they differ a little bit from what Adecoagro has been doing for the past 15 years. So I think that will be the question. And finally, whether you're going to be consolidating Profertil's financials or you're going to be just taking the 50% stake as a co-control format? And that is going to impact the financials of the company on a reporting basis? Those are my 3 points.

Okay. Starting from the last one, we are not going to consolidate. In this, 50% still needs to happen. And whenever we make it happen, we'll explain exactly how it's going to be reported, but we are not going to consolidate. On the second one on how to think about Adecoagro and our growth strategy. As I just explained, we are focusing within food and energy business -- food and energy sector, and that's where we've been since the very beginning. We started with crop production, then we got into the rice operation, then we got into the sugar, ethanol and energy business. And then we went into the dairy business and the peanut business. So we've been growing within the food and energy production all along the way. So you should expect Adecoagro to continue within the same business segments or business lines. And now we have a supporting shareholder that gives us the ability to continue growing in this pace that we've been always growing. For us, the main something we take into account when we're thinking growing is how we can manage and control those businesses and not only capital allocation, but also being able to manage and have the right management teams on each one of these businesses that we are executing. This is a company, Profertil, that we know since 20 years ago. We've been always looking at this company, and this is a very specific target that has appeared today for us. And that's why we are so happy with what's going on today. And the first question you mentioned regarding the normalized EBITDA. Nobody can know this, as you've been able to see in the past years, but I would assume that for 2026, around $300 million, that should be normalized EBITDA in a normal year.

Next question from Isabella Simonato with Bank of America.

I wanted to maybe -- I don't want to sound repetitive, but just to better understand the rationale of the transaction in the sense that I understand that Tether, right, as a shareholder has also interest right in this asset and is optimistic about the deal. But I wonder why this is being done by Adecoagro and maybe not as a separate investment by Tether, right, given this is not an asset that will be consolidated. I understand it's part of the supply chain across agriculture and food. But given that, again, this won't be consolidated and you guys didn't talk about synergies or so on, so I wonder why this is being done with Adecoagro's balance sheet. And considering other potential investments, including Adecoagro's own shares, right, what's the rationale for the deal? And it's still back to the first questions, right? You guys mentioned and, Mariano, you just said again, right, that you now have a shareholder that support Adecoagro, right, in those sort of moves. I wondered if you could elaborate a little bit more on what does that mean, right? If this has been, from a strategic point of view, if eventually this could be, financially speaking, right, eventually in the need of equity or so on to bring down debt. So just to -- I don't think it's clear to us, right, when you guys mentioned Tether's support, right, what exactly does it mean?

Isabella, thank you for your question. First of all, why Adecoagro? This is a company, as I mentioned before, that we've been looking for 20 years. Since 2 years ago, even before Tether was a shareholder, we started talking about this company with our Board, explaining what were the benefits of this company. Nutrien announced 1.5 years ago that this was for sale. So we've been working on this potential transaction way before Tether was a shareholder with us. And furthermore, in Adecoagro, we've always been developing sustainable production models aiming to be the low-cost producer on each one of the commodities that we were producing. So that's why we are producing sugarcane or sugar, ethanol and energy in Brazil in the best regions where you can produce sugarcane. That's why we are producing dairy and dairy products in the Humid Pampas. That is the best place where you can produce milk worldwide. That's why we are producing rice in the Northeast region of Argentina, where you are the most competitive in terms of being the low-cost producers. So because of this is that today, we are explaining why you are the best producer of urea, and worldwide, we would be the low-cost producers of urea in Bahía Blanca, where we have the best port in Argentina to export and to sell within the domestic market also the urea and you have the best access to the gas coming from Vaca Muerta and the gas coming from the south of Argentina. So being the gas, the most important input in the production of urea and having Vaca Muerta in Argentina and having Argentina becoming an exporter of gas is taking advantage of the natural conditions of what's going on. That's why Adecoagro makes sense to be part of this opportunity. And now I will let Juan explain if he has something else to say on why Tether is supporting. I think he just explained what that means that Tether is supporting Adecoagro.

Thank you, Mariano. And to add a little bit more on what you said and about the question is, I don't think you should see Adecoagro as just a disparate collection of very efficient low-cost assets. There's a strategic and industrial logic behind putting all of these assets together. As we become a company focused in energy and food production that can grow the inputs, that can provide the inputs, that can lease the farms, that can industrialize the products, that can commercialize them, and who can do it using its own generated energy, the power and the growth of this company, and the whole ecosystem where we are operating is going to have synergies and profitability that are unique to the fact that this company has all of these assets. And it's not only a hedge fund strategy that this deal is being done because it was very profitable and opportunistic. It's being done inside Adecoagro because it corresponds to the strategy and the idea and the vision that we have for the company. And I think what you're going to start seeing over the next 12 and 18 months, more of this system generating returns and synergies and creating value precisely, because all of these assets complement each other, they correlate each other in a big way, and that's going to be able to generate new revenue streams that didn't exist before when we didn't have it. So we are supporting that big industrial logic and not only investments that could be done here or there because financially they are good. And that's the way also we committed since we invested in this company that we believe that Adecoagro was the best platform in order to generate these investments, not simply because financially it makes sense, because we believe in the strategies that they are deploying and we are able to support it and to accelerate it. For me, this deal is much more transformative and a signal of what's coming to Adecoagro and it's very exciting anything that's been done before, whether the margins were higher or lower, operating in the normal perimeter until now. So you can expect that line to continue. It's the one we will support. We will definitely always prefer to allocate capital if it's needed with the other shareholders of the company to Adecoagro rather than do investments outside of it as long as it's in exactly the same scope and follows this logic that I've been explaining. So that's how we can add more value as a shareholder is knowing that we will be there and Adecoagro is really our preferred way of investing in a lot of assets because there's a very big logic and they can generate more value out of it than simply investing on the side on a financial deal because the IRR or the cash flows are attractive. And we believe a lot in the capacity of the company to generate this story, this growth story and the synergies going forward.

[Operator Instructions] Our next question comes from Lucas Ferreira with JPMorgan.

I want to understand a bit more the assets, not super familiar with that. So I just wanted to understand, I mean, the production capacity, if it has room to expand capacity with this, like you mentioned growth of Vaca Muerta. And eventually, obviously, the cost of gas will depend on international prices, but with more availability, if this cost could even go down for you. And if you can comment also on the below the EBITDA line, so assuming $300 million EBITDA, so how much free cash flow the asset generates? So how much CapEx is involved? And if there's any growth CapEx ongoing, anything that we should be aware of in the CapEx line? And sorry, one last one is if you have a number for synergies with Adecoagro. So I assume the wheat, rice, corn, right, I mean a lot of urea. If you would be buying at market prices anyway. So if there's any synergies with your current farming operations in Argentina or eventually even in Brazil?

Lucas, thank you for your question. If this transaction is closed -- so whenever this transaction is closed, we are going to go into all the details that we can share on this asset. As we explained in the asset, the EBITDA depends on the price of urea. This is an import parity instead of an export parity because Argentina and the regions are net importers. So that's why it is important. The EBITDA has not a lot of relevant maintenance CapEx. It's only once every 4 years that there is relatively higher or around $50 million to $60 million maintenance CapEx. The rest of the maintenance CapEx is relatively low. The plant is very simple, but very expensive to build a new one. Building a new plant like this is around $2 billion and 4 years to develop it. That's why it takes a lot of time when we think on a growth expansion. There are projects that are public projects of this plant to double capacity. There is room to double capacity, but that is a very important project that can take almost 4 years and a huge investment. So that is a different story and something to be discussed further, and those are potential growth projects, but we are not talking about that today nor tomorrow. That will depend on all the other expansion projects that we have, our debt capacity, et cetera, et cetera. So today, we are only talking about this asset as that is very efficient and working very well today.

Thank you. 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 very much. Thank you for participating on this call and hope to see you in our upcoming calls.

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