Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro's Fourth Quarter 2018 Results Conference Call. Today with us, we have Mr. Mariano Bosch, CEO; Mr. Charlie Boero Hughes, CFO; and Mr. Juan Ignacio Galleano, Investor Relations Manager.

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 presentations. After the Company’s remarks are completed, there will be a question-and-answer section. At that time, further instructions will be given.

[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, it depends 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 would like to turn the conference over to Mr. Mariano Bosch, CEO. Mr.

Bosch, you may begin your conference..

powder milk for the export market; fluid for domestic market; and cheese for both markets. Both these products will be manufactured under our sustainable production system guaranteeing food traceability and the highest production standards to our final yields enabling us to develop a reliable and long-term commercial relation with our final yields.

As a summary, 2018 has been a good year, generating results in line with results outlined in our 5-year plan. We have now started a new year full of challenges. But most importantly, by the end of 2019, we shall end the deployment of major CapEx under the 5-year plan and expect to commence generating a strong free cash flow position.

In this regard, the Company is already analyzing the implementation of a new policy to distribute returns to our shareholders. To conclude, I would like to finish by reiterating my gratitude to all the operational and management teams.

It is thanks to their daily efforts and hard work that we have become one of the low-cost producers of food and renewal energy. Now I will let Charlie walk you through the numbers of the quarter..

one in the city of Morteros, Province of Cordoba, right where the largest dairy basin of the country is based; the other plant located in the city of Chivilcoy, Province of Buenos Aires, is halfway between our dairy free-stalls facilities and the City of Buenos Aires, the largest dairy market.

We are confident that this transaction will be accretive to our existing shareholders as expected ROIC lies above our cost of capital. Let's move to Page 15, where I would like to walk you through our Land Transformation business. In January of 2019, we completed the sale of Alto Alegre Farm, located in the Tocantins, Brazil.

The aggregate selling reached $16.8 million for a total of 6080 hectares, from which 3065 are croppable. I would like to highlight that the farm was sold at a 34% premium to the latest Cushman and Wakefield´s independent farmland appraisal.

Over the last 12 years, we have been able to generate gains of over $200 million by strategically selling at least one of our fully matured farms per year. Monetizing a portion of our land transformation gains allow us to redeploy the capital to highly yielded activities, enabling us to continue growing and enhancing shareholder value.

Let's now turn to Page 16, which shows the evolution of Adecoagro's consolidated operational and financial performance. On a consolidated basis, net sales in 2018 reached $770 million, 14% lower year-over-year.

This, as we have already seen, is mainly explained by the combination of lower sugar and energy selling volumes, coupled with lower sugar and ethanol prices, measured in U.S. dollars. Adjusted EBITDA in turn totaled $314 million, marking a 14% increase compared to the same period of last year. Positive results were achieved in all of our businesses.

As previously explained, the good performance of our Crops and Rice businesses were primarily the result of enhanced agricultural and industrial efficiencies, coupled with lower production costs measured in U.S. dollars.

As for Sugar, Ethanol & Energy business, positive results were driven by higher crushing volumes, which allowed us to dilute fixed costs, coupled with the gain derived from the mark-to-market of our commodity hedge position. To conclude, please turn to Slide 17 to take a look at our net debt position.

As you may see in the left chart, our gross indebtedness as of December 31, 2018, stands at $863 million, while net debt stands at $589 million, 8.4% lower quarter-over-quarter and 7.4% higher year-over-year. The increase in net debt from a yearly perspective is primarily explained by our investment program.

It's important to highlight that due to the growth in adjusted EBITDA, however, net debt ratio reached 1.87 times, 5.5% lower year-over-year. I'd like to mention that our debt is very well structured in the long run with an average maturity of 6 years. Thank you very much for your time. We are now open to questions..

Thank you. The floor is now open for questions. [Operator Instructions] The first question today comes from Danniela Eiger with Bank of America. Please go ahead..

I have two questions, the first on sugar and ethanol business.

I wanted to ask you if you can comment on your outlook for the next season in terms of yields given the, how the weather has evolved in the beginning of the year here in Brazil? And also in terms of the mix, should we expect you to continue maximizing ethanol in which a mix similar to what we saw in 2018? That is my first question.

And the second question, just wanted to do a follow-up on your comments, Mariano, regarding free cash flow, just to make sure I understand.

For 2019, we should still expect some limited cash flow regeneration as you should deliver the pick of your investment cycle of your 5-year plan, and in 2020 we should start to see a stronger free cash flow regeneration, is that it? And also, regarding the potential change on your distribution policy, that would, if that is indeed changed, we should, would see dividend payments already in 2020..

Danniela, thank you for your questions. I'm going to take the last part of your question and then Renato will get into details on the first part of your question regarding yields and mix.

So regarding the cash flow generation, you are absolutely correct, 2019 is a year where we are doing most of the CapEx of the 5-year plan, so we finished most of the CapEx of the 5-year Plan. So the cash flow generation will be strong in 2020.

So regarding when is it that we are analyzing the way on how to pay this cash flow to our shareholders and how is it that we are going to be implementing is what we are currently discussion, we are currently discussing.

We are discussing this between the senior management and board, and we'll figure out how is it that we are going to be paying this strong cash flow generation in 2020. And we start that same year or how and how to pay, this is a discussion that is happening this year.

Then on the yields and the mix for this current year, Renato can you answer Danniela's question, please?.

Yes. So regarding the yields, similar to the rest of the Center-South region, the yields were negatively impacted by drier weather in December and January. However, in February and March, rains have returned to its historical level, so improving our sugarcane fields outlook.

Therefore, we expect yields between 85 tons and 90 tons per hectare, considering normal weather conditions from now on. Regarding the mix, we should keep maximizing it on our, in our views. As in our view, ethanol should continue to be the most profitable in '19.

The combination of rising demand and stagnant production should lead to a tight S&D scenario consequent to results in the high historic levels compared to '18. Furthermore, as the average portion of our ethanol volumes come from Mato Grosso do Sul, the tax rebate provided by the state should keep us maximizing ethanol.

As a matter of comparison, hydrous in Mato Grosso do Sul is currently equivalent to $0.16 per pound and anhydrous to $0.17 per pound, premium was 29% and 37% over sugar, respectively. It's important to highlight that our ethanol flexibility is higher compared to the average of the Center-South.

In 2018, we were able to reach 75% ethanol mix while the Center-South average was 65%..

That's super clear. And if I could only do a follow-up on the first question.

You mentioned about distribution and how about share buybacks? Are you also looking into that as you wouldn't need to change anything like approve any policy change, right?.

Yes, Danniela. We are also looking into that. That's why I'm talking about returning capital to shareholders. So we are analyzing what would be our new policy in terms of dividends and buybacks and that's, of course, is both analyzed when we are making this discussion..

[Operator Instructions] The next question comes from Javier Martinez with Morgan Stanley. Please go ahead..

Hi good morning Mariano and Charlie. Sorry to keep asking again about the dividend. In my numbers, you are going to be able to generate more than 20% free cash flow yield soon and with low risk.

So Mariano, what is the discussion? What is the -- so I don't understand what is the -- so can you give us some color on the nature of the discussion, on the points of the discussion? Why do we have a discussion -- do we have any risk that you announce a new expansion plan in 1, 2 years? Or you are going to pay dividends to the shareholders?.

No. It's clear that we are going to return capital to our shareholders. That is absolutely clear, and there is no discussion about that. So what we are discussing is how is it that we are going to implement that and at what time, at what point of 2020.

So in 2020, we are going to be and we are very confident that we are going to be in a strong cash position. So assuming that in 2020 we are in that strong cash position, we are going to be returning capital to our shareholders. That's no discussion about.

The discussion is how to implement this policy, how much dividend, how much buyback and how to structure that. That's the discussion that is within our company today, including board and senior management..

Okay.

So you are coming with a proposal to the board probably for April this year, and we will know we have a decision on this probably after April, that's the idea?.

We don't know exactly when is it that we are going to be clarifying what our policy is going to be. I would like to -- we have a clear view that 2019 is where we need to finish our 5-year plan. And so on '19, there is no major decision to be taken.

So by the end of '19, we should know exactly how is it that we are going to distribute dividends or buybacks or both in 2020. So that's why I don't see a hurry to -- for that to happen in April of this year.

I think by the third quarter of this year, we should be clarifying to the market exactly how is that we are going to be returning capital to our shareholders..

Okay, clear. Thank you, Mariano. A question now on SanCor. So now that you have the actual....

SanCor has nothing -- just to clarify, SanCor has nothing to do with that.

Is it Javier?.

Yes, yes, yes..

So the question about the dairy plants, if you want to ask any question about the dairy plants or dairy segment, happy to answer, and we are very happy to talk about the dairy segment..

Yes, agree. So it's a parallel question. It's a new question.

It's on the -- I'm trying to understand, I mean, how fast and how far the generation of synergies is going to be happening on SanCor? So I'm trying to understand if SanCor already going to generate incremental EBITDA in 2019 so to try to -- because it's a new business and so we have less visibility on that.

So how EBITDA is going to be impacted by -- if you can give us some color on that will be helpful. Thank you..

Yes, of course. That's, again to clarify, we never thought about the impact on SanCor. SanCor is a different company. We didn't acquire SanCor. That's a totally different company..

No, what I'm talking, not about SanCor, I'm talking about the plants, about the....

Okay. Now we are talking. Okay, so we are talking about 2 plants and as we explained in my introduction, I think Charlie's detailed explanation on how this work has synergized and what is the profitability that we expect from these 2 plants in the synergy with the rest of the dairy segment.

We expect to generate about 20% return, 20% to 25% return on the CapEx that we are investing today. We are investing this $45 million that if we include some additional CapEx or working capital, we actually are talking about the round $50 million.

So if we are expecting to get 20% to 25%, we are expecting to reach to between $10 million to $12 million or $15 million of EBITDA once stabilized. We expect to stabilize this in 2, 3 years. That's the timing on when we expect to stabilize and to generate this type of EBITDA.

How is it that this will impact in 2019 and '20? In '19, we can expect that this is the takeover moment, the transition year. So in '19, we shouldn't expect a lot of results. But in 2020, it's clear that we should expect more near the stabilized number.

So 2019 is the year where we are starting and we don't want to compromise, and we are being very conservative on this 2019 year. But in 2020, we should be more near the stabilized place than what is going to be 2019..

So 2020, you have already positive EBITDA? 2019….

We do expect positive EBITDA in 2019 also. In 2019, we do expect positive EBITDA, but not relevant EBITDA as we do expect in 2020. And in 2021 and 2023 is where we expect to be stabilizing this business on the numbers that we just said..

Your next question comes from Juliana Oliveira with Bank of America..

So I want to understand the strategy on the higher cash position. Are you planning to use this cash increase to finance the 5-year plan? My concern is whether this use of cash could pressure leverage? That's it..

Thank you, Juliana. Charlie will answer your question..

Juliana, we have already spent the money to, for the acquisition of the 2 milking plants, and we don't expect that we will be increasing significantly our leverage level as this acquisition will be financed by the cash that we are generating at the operation keeping in mind that net cash from operation in 2018 is roughly $80 million.

This is after paying taxes, working capital, maintenance CapEx and interests. So a part of that cash that we are generating at the operation will be used to finance our expansion CapEx, which is aligned and in compliance and on schedule and on budget with our 5-year growth plan.

So we maintain our objective, our target to be at 2x net debt EBITDA ratio regarding our leverage levels..

[Operator Instructions] The next question comes from Fernanda Cunha with Citibank..

I have a question on the crop side. You mentioned on the press release that U.S. and China has, had a temporary truce, right, into trading tension. What can we expect in terms of prices in the next 6 months, please? And the second question is regarding ethanol hedge.

We have been hearing from a lot of your peers that you have been accessing the market to hedge a slightly higher amount of ethanol, and I'm just wondering if you're following the same strategy? And how can we think of average prices for the next half year?.

Fernanda, can you repeat the first part of your question on the release that we couldn't….

Yes..

Yes, that we couldn't understand well, what was the point of….

All right, sorry. No, you mentioned on the press release, right, a temporary truce on the trade tension between U.S.

and China, and I'm just wondering, how you see that affecting crop prices in the next 6 months?.

Okay, clear. Thank you. I'm going ask Marcelo Sanchez to answer this question..

Thank you, Fernanda. Yes, we have been witnessing the impact of U.S.-China tensions and the latest trade notification within the last month. That has impacted already the prices.

Since -- if you remember since the last G20 in Argentina, when the prices had spiked in the way of 20%, then the movement on the pricing went ups and downs when the possibilities of the trade was closing to a positive outcome.

And now, we are in the lows of the prices already in soybean and corn mainly -- besides that, would have been -- that soy prices have been affected because the inventories are in the highest level and that also has been adding to the growing prices. Of course, besides that, the farm position also has grown to a record short.

And we think that in the next coming months that might be providing fuel to corn and soy prices, and we will be witnessing a rally if we have any weather event coming after the U.S. planting. That's basically what I can say about the impact on the trade..

And if I may just follow-up, when you say....

You mentioned something about changing ethanol, we're not doing so, that's not. Last year, we had a hedging strategy using the [indiscernible], but not this time so far. I mean, we are in a level of $0.16 per pound ethanol equivalent so far, then we are speeding up the sales.

In terms of the economy strategy that took place that we carried out in the end of December, we enjoyed the rising prices occurred February onwards that allowed us to capture almost 12% in a month from tariff premiums, and our strategy now is to take advantage of corn prices that as Renato was saying, we are in Center-South, in Mato Grosso do Sul, we are obtaining $0.16 per pound sugar equivalent.

And that's basically -- I don’t know if you have any questions..

Sorry, if I just may follow-up on this last question. I don't think I understood.

So when you say you are speeding up the sales, it's regarding to the 2018-2019 crop, right? I'm asking if you're doing any kind of hedges for the next crop year? So if you're taking advantage of the prices right now to hedge for your next crop year?.

No. We are not doing hedges on the ethanol for next year.

Because this says that we are speeding up are part of the current strategy of the previous crop and part of what we are harvesting this year because remember we have this continuous harvest where during January, February and March, we are crushing, and we are doing 100% of ethanol because of these relative prices. So that's what we are selling today.

That is part of this year also because of continuous harvest that we continue harvesting during summertime..

[Operator Instructions] This concludes the question-and-answer section. At this time, I would like to turn the floor black over to Mr. Bosch for any closing remarks..

Okay. Thank you for your questions. Thank you for your participation, and hope to see you in our upcoming events..

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