Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro's second quarter 2019 results conference call. Today with us, we have Mr. Mariano Bosch, CEO, and Mr. Carlos Boero Hughes, CFO, and Mr. Juan Ignacio Galiano, Investor Relations Manager. We would like to inform you that this event is being recorded, and all participants will be in listen-only mode during the company's presentation. After the company's remarks are completed, there will be a question and answer section. At that time, further instructions will be given. Should any participant need assistance during this call, please press star then zero to reach the operator. 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 the 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'd like to turn the conference over to Mr. Mariano Bosch, CEO. Mr. Bosch, you may begin your conference.
Good morning. Thank you for joining Adecoagro's 2019 second quarter results. We had strong operational results during the second quarter in most of our businesses. In our sugar, ethanol, and energy business, we continue maximizing ethanol production, reaching 80% on a year-to-date basis, making us the producers with the highest degree of flexibility in the production mix. This represents a clear competitive advantage compared to other players in the industry and put us in a very good position to maximize returns considering ethanol pricing dynamics going forward. Good generation efficiency at the same time further contributed to generate positive results. Indeed, we reached as much as 71 kWh per ton crushed, an all-time record. Total production costs continue to reduce, even factoring the lower yields as a result of adverse weather conditions. Weather conditions have been particularly dry during this year.
This, on the one hand, has allowed us to accelerate the crushing pace, making up the delay during the first quarter. On the other hand, this has been detrimental to the proper development of the cane, reason why productivity deals or yields per hectare are going down. However, thanks to the efficiencies attained at the industry level, we were able to offset higher agricultural costs, resulting in a reduction in total cost of production. As you all may be aware, a frost hit Brazil during July, affecting 20% of our total cane area. Thanks to our rapid response, we were able to mitigate the effect. At the same time, we strategically decided to slow down the milling pace for the rest of the year in order to produce only ethanol.
In fact, given the constructive price scenario for the second half of the year, we are confident that most of the effect of the frost will be offset. At the same time, and thanks to our prior investments, we've been able to increase our daily ethanol production by almost 15%, enabling us to further profit from higher prices. Regarding the farming and transformation business, our daily operations continue to deliver good results. We keep on improving in our operational performance. We are confident that we are by far the most efficient producer in the market, producing almost 37 liters per cow per day. As regards the two processing facilities we acquired last February, EBPA during 2Q 2019 was already break-even, proving the successful takeover and turnaround of the facilities.
Needless to say, there are still things to fine-tune, but we feel very optimistic about the many opportunities we have going forward. We expect the facility to deliver positive results sooner than originally expected. In our crops business, the harvest of our grain production is well advanced. Weather has been good for the developing of our crops. Rains were timely and abundant throughout the flowering stage of each crop. Yields were above the five-year average and significantly higher compared to the previous harvest season that was severely affected by the drought that hit Argentina on the previous season. Our rice business outperformed during this harvest year. All the investments related to water management, including glasshouses, improving logistics of the transportation of the rough rice from the farms to the mills and enhancing industrial efficiencies have paid off, resulting in a 20% increase in EBITDA year-over-year.
All of the growth projects we announced are ongoing, according to schedule and budget. We are confident that they will contribute to the overall performance of the company, enhancing operational and financial results. As you all know, last Sunday, we had presidential primary elections in Argentina. The results show a strong support for candidate Fernández versus current President Macri. Over the last few days, the financial market has been under a lot of stress and volatility. We cannot assure the final results of the presidential election during next October, and do not know the details of future policies and economic measures. However, I would like to remark that regardless of the final results, the company remains in a good financial condition and will remain profitable in an event market conditions change due to different public policies.
This is mainly due to our disciplined focus on keeping our costs low, having a well-structured debt, remaining top of key accounts, and having the right flexibility of our assets to produce products devoted to attend the exports or the domestic market, allowing us to maximize our returns. At the same time, it's worth remembering that Argentina represents only 20% of consolidated EBITDA and 30% of consolidated EBIT. Now, I will let Charlie walk you through the numbers of the quarter.
Thank you, Mariano. Good morning, everyone. Let's start on page four with a brief analysis on the rains in Mato Grosso do Sul. As seen on the chart, rains in our cluster in Mato Grosso do Sul during the first semester of 2019 were 35% below the 10-year average and 26% below the same period of last year. During the second quarter of 2019, rains were 65% lower than the 10-year average, allowing us to accelerate the pace of crushing as it can be seen in the following slide. Let's continue with slide five, where I would like to discuss our sugarcane crushing. Year to date, a total of 5.4 million tons of sugarcane have been crushed, 1.3% higher than the first six months of 2018.
Considering crushing volumes during the first quarter of 2019 were lower than those of the first quarter of 2018, the increase during the first half of the year is fully explained by the second quarter dynamics. As a matter of fact, effect in days during the quarter reached 75 days, marking a 5.1% increase year-over-year. Please jump now to page six, where I would like to walk you through our agricultural productivity. As a consequence of the dry weather during the first six months of 2019, sugarcane yields during the second quarter reached 85 tons per hectare, 11.3% lower than the second quarter of 2018. In terms of sugar content, TRS during the quarter reached 127 kilograms per ton, 2.1% higher compared to the same period of last year.
The combination of those two effects resulted in TRS production per hectare of 10.5 tons, 7.8% lower year-over-year. Let's move ahead to slide seven, where I would like to discuss our production mix. As you can see in the top left chart, during the second quarter of 2019, anhydrous ethanol and hydrous ethanol in the Mato Grosso do Sul traded at an average price of $0.159 and $0.146 per pound, sugar equivalent, 29.7% and 19.3% premium to sugar, respectively. In this context, and leveraging from one of our competitive advantages, most of our TRS production during the first six months of 2019 was diverted towards ethanol. Indeed, 80% of the extracted sugarcane juice went to ethanol and only 20% for sugar.
I would like to insist that this high degree in flexibility constitutes one of our most important competitive advantages, since it allow us to make a more efficient use of our fixed assets. As a result of this strategy, ethanol accounted for 73.5% of the total EBITDA generation in our sugar, ethanol, and energy business during the first half of the year, while sugar accounted for only 12.1%. Let's please turn to slide eight, where I would like to discuss quarterly sales. As you can see on the top left chart, ethanol sales volumes increased by 26.4% compared to the second quarter of 2018. As already said, this responds to our strategic decision to maximize ethanol production to profit from higher relative prices. Average selling prices during the quarter increased by 10%.
However, as a result of the depreciation of the Brazilian real, selling prices went down by 3.1%, reaching $0.154 per pound. All in all, net sales reached $77.1 million, marking a 23% increase compared to the second quarter of 2018. In the case of energy, selling volumes reached 315,000 MWh, marking a 35.9% increase due to the larger bagasse availability during the second quarter as a result of higher crushing volumes and the carried over stock from previous quarter. Average selling prices measured in dollars were $49 per MWh, marking a 26.4% decrease compared to the same period of last year. Overall, net sales remained in line with the previous year. Sugar sales volumes were 90,000 tons, 14.7% lower than the second quarter of 2018. Average net selling prices reached $0.133 per pound, 5% lower compared to the second quarter of 2018.
As a result, net sales reached $26.6 million, 18.6% lower compared to the second quarter of 2018. Let's move to slide nine, where I would like to explain our production costs. As shown on the bottom graph, total production costs, excluding the impact of the adoption of IFRS 16 for the six-month period of 2019, reached $0.114 per pound, 3.4% lower year-over-year. Industrial costs were reduced by 21.4% as a result of our higher crushing volumes, enhanced industrial efficiencies, and the depreciation of the BRL. At the same time, these positive effects were partially offset by the 2.5% higher agricultural costs, driven by higher harvested area due to lower yields. Finally, to conclude with the Sugar, Ethanol, and Energy business, please turn to slide 10. I would like to discuss financial performance.
Adjusted EBITDA during the first six months of 2019 was $112.8 million, $16.1 million or 12.5% lower compared to the first six months of 2018. Evidently, this result includes the mark-to-market effect of our derivative hedge position and the unrealized changes in fair value of biological assets. We strictly focus on the operational performance of the business. It's more accurate to subtract these non-operating results. Once adjusted, total EBITDA for the first half of the year reached $110 million, 3% higher compared to the same period of last year. Higher operational margins were mainly driven by lower production costs, as previously explained. I would now like to move on to the farming business. Please direct your attention to slide 12. As of August 1st of 2019, 90.1% of total planted area was successfully harvested. The remaining hectares are expected to be harvested by early August.
Compared to the previous harvest season, yields were significantly higher. Normal weather conditions, coupled with enhanced efficiencies at farm level, explains the increase. At the same time, it's worth remembering that 2017 and 2018 harvest year affected by the severe drought that hit Argentina during summer months. Let's move to page 13, where I would like to walk you through the financial performance of our farming and land transformation businesses. Year to date, adjusted EBITDA in the farming and land transformation businesses reached $42.4 million, $37.6 million or 46.9% lower year-over-year. The decrease in the financial performance were primarily explained by the $26.9 million lower results generated from farm sales, coupled with lower commodity prices. In the case of the rice business, higher margins during the first half of the year were driven by the first quarter dynamics.
Indeed, the combination of carried stocks coupled with enhanced industrial efficiencies allow us to increase processing activities and thus selling volumes. For the crops business, we generated an adjusted EBITDA of $8.4 million during the first semester, 65.2% or $15.8 million lower compared to the same period of last year. This decrease is mainly explained by the combination of lower commodity prices, coupled with lower results from the mark-to-market of our commodity hedge positions. These results were partially offset by higher yields. Regarding our dairy business, higher production and selling volume, coupled with higher average selling prices, were responsible for the increase in financial performance. Indeed, prices increased as a result of the shortage of milk due to the weather-related issues. Thanks to our free stall dairy system, milk production was not affected, allowing us to fully profit from higher prices.
At the same time, higher selling volumes were driven by the 17.5% increase in our average cow herd, as we continued populating our third free stall facility. Lastly, during the first six months of 2019, the company completed the sale of Alto Alegre farm, resulting in an adjusted EBITDA of $9.4 million. Compared to the results generated by the sale of Rio de Janeiro and Conchita farms during the first six months of 2018, it represents a 74.1% decrease. Let's now turn to page 15, which shows the evolution of Adecoagro's consolidated operational and financial performance. As shown on the top right chart, net sales in the first six months of 2019 reached $364 million, 2.8% higher year-over-year.
This is mainly explained by the combination by higher sales in the rice and dairy businesses as a result of higher selling volumes coupled with higher selling milk prices, partially offset by the combination effect of lower sugar selling volumes coupled with lower sugar, ethanol, and crop prices measured in dollars. Adjusted EBITDA totaled $145 million during the first six months of 2019, marking a 27% decrease compared to the same period of last year. As previously explained, positive results in our dairy and rice businesses were fully offset by the financial performance of our sugar, ethanol, and energy, and land transformation businesses. To conclude, please turn to slide 16 to take a look at our net debt position.
As you may see in the left chart, our gross indebtedness as of June 30th of 2019 stands at $913 million, while net debt stands at $705 million, 6% higher year-over-year. The increase was mainly driven by higher investments in our farming businesses, specifically the acquisition of industrial facilities, both dairy and peanuts. Net debt ratio reached 2.97 times, 27% higher year-over-year. We consider our balance sheet to be in a good position, considering not only the adequate debt level, but also its long-term tenor. At the same time, we expect the ratio to decrease as we enter the second semester due to the combined effect of lower working capital requirements and higher EBITDA generation. Thank you very much for your time. We are now open to questions.
Thank you. The floor is now open for questions. If you have a question, please press star then one on your touch-tone phone at this or any time. If at any point your question has been answered, you may remove yourself from the queue by pressing star then two. Questions will be taken in the order they are received. We do ask that when you pose your question, that you pick up your handset to provide optimum sound quality. Our first question today comes from Fernanda Cunha with Citibank. Please go ahead.
Hi. Good morning, everyone. Thank you for taking my questions. The first one that I have is regarding your production cost and most specifically to maintenance CapEx. When we look at your running rates for CapEx, you spent nearly around 70% of your total budget, at least, the $240 million, $250 million budget that you mentioned in the last call. I would like to understand mostly, if we're going to see any CapEx overrun for this year. What could we be looking at recurring maintenance CapEx? It seems that it's actually higher in the sugar ethanol business. Going to your leverage, it seems that you're going to end the year at a net debt to EBITDA ratio of 2.5, maybe slightly higher than that.
What can we be thinking in terms of capital allocations and potentially a dividend policy announced by the year-end? Thank you.
Hi, Fernanda. Thank you for your question. On the maintenance CapEx, regarding the production cost, most of that is in our sugar, ethanol, and energy business. I would like Renato to explain where we are on that part of your question, and then I will continue with the other part.
Hi. Thank you for our question, Fernanda. The largest part of the maintenance CapEx was expansive in the first half of the year, so it's a matter of anticipation. Therefore, we expect to reduce the CapEx during the second semester, finish 2019 with a total CapEx lower than last year.
Thank you, Renato. Regarding what you can expect on capital allocation, I want to continue with what we have already expressed in our previous two quarters. We've been explaining that we have this five-year plan that we are almost done. We have no major CapEx going forward on this five-year plan that we explained in our Investor Day. It's clear that from now on, we start decreasing this net debt that you are mentioning. We've always expressed that we want to be within the two times EBITDA. Regarding capital allocation, as we've said before, 2020 is the year where we become free cash flow positive, where we'll immediately
We can to decrease the debt, and then we will have to decide how we return the capital to our shareholders, where the dividend, where the buyback, and how is it that we make that policy going forward. As I explained before, that's something that we can expect us to talk about it by the end of this year or beginning of next year, when we have this clear visibility on how the free cash flow positive becomes. That, as I mentioned before, is being discussed within senior management and board. Okay. Yes, Fernanda?
Yes. If I may just follow up on maintenance CapEx, especially in the sugar ethanol business. When we look, at least in the last call, you mentioned that around 80%-90% of your costs are in BRL. We've seen, if we put first half of 2019 against last year, there has been a BRL devaluation of over 19%, but your overall production costs only came down around 2.5%. Can you explain then how exactly I would thought that actually maintenance CapEx would have actually come down on a running basis, and it doesn't seem like that. If you could just give more color on this, I would appreciate it. Thank you.
Yeah. Okay. I'm going to make a quick comment on this, and then Renato may add something. The BRL depreciation has a positive effect, but as we mentioned in the call, we are having lower yields, and so that has an impact on the agricultural costs. The agricultural costs went up in terms of BRL, and was not enough the depreciation of the BRL to offset that part. You've seen the benefits on the industrial cost. That is basically why you are seeing the numbers we are seeing today. I don't know if Carlos or Renato want to add something.
Fernanda, basically, as Mariano was saying, we do have the benefit of the devaluation of the BRL impacting on our industrial costs, basically. That was more than offset by the increase in the agricultural costs, mainly coming from having to harvest more hectares as a consequence of having lower yields in order to continue supplying with grain to the facilities.
Okay. Thank you, guys. I'll hand over.
Okay. Thank you. Fernanda.
The next question comes from Gustavo Alvarenga with Banco Santander. Please go ahead.
Hi, guys. Thanks for the opportunity. I have two questions. The first one, I'd like to understand better the impact of the frost that happened in beginning of July in your crop. If you can expect eventually lower productivity or even higher costs for the second half. The second question is regarding the company's predictions for second half as well. If current prices, if it continues to make sense to maximize ethanol production or eventually start to increase sugar production given the recent correction in oil prices. If I may, can I do a third question regarding Argentina's operations, just to understand the impact of the freeze in dairy price that was announced yesterday. What's the impact that you can expect for company's results in third quarter? Thank you.
Okay. Thank you Gustavo, very much for your question. Renato will explain the impact of the frost and also some of this, what are we doing regarding on the ethanol and sugar mix. Renato, can you go through that question, please?
Thank you for your question, Gustavo. As Mariano mentioned, approximately 20% of our sugarcane fields were impacted by the frost, reducing the expected yields for the current year in the beginning of 2020. Because of the frost and the drier than normal weather, we have reviewed our crushing estimates in about 5%, which means we should have a total crushing similar to last year. The negative impact of the lower crushing will be offset by the higher ethanol production and by a project to gain efficiency and to reduce costs that was recently implemented. In fact, we have been producing 15% more ethanol than our daily nominal capacity, which will add an additional 70,000 cubic meters in our year production, generating an extra BRL 8.5 million.
This was a result of operational adjustments with minor investments, such as increasing the alcoholic level of the fermentation tanks and storage of the molasses to produce ethanol when the mill is not operating. In addition, we will slow down the crushing pace in the coming quarters. Maximize ethanol and take more advantage of the ethanol premium over sugar that is currently close to 25%. Regarding the efficiency project, we expect savings of more than $15 million in 2019. It includes the planting reduction cost by the increase of the MPB Mayora technology. Actually, we expect to plant two-thirds of our next year planting using this methodology, with seeds produced in our biofactory. We have built an in-house fertilizer blender that we have been mixing our own fertilizer formulas and applying each blended with the concentrated vinasse.
Regarding the 2020 impact, we should have a low first quarter and then speed up the crushing pace sufficient to crush about 10% more sugarcane compared to this year. It's too early to say, and it depends on weather conditions from now on. Regarding the second part of the question, the ethanol mix, we expect to increase even further our ethanol mix as ethanol should continue to be the most processable product. The combination of rising demand, stagnant production, and low inventories is leading to a tight S&D scenario, consequently resulting in higher prices compared to 2018. In Mato Grosso do Sul, where our cluster is located, both hydrous and anhydrous are currently traded at a premium of more than 25 over sugar. We are going to take advantage of all the adjustments in production that I just mentioned to you.
Thank you, Renato, very much for your question. Gustavo, on the third part of your question, what specifically your question about Argentina that I couldn't understand?
I just want to understand the impact of the price freeze that was announced yesterday for dairy products. How could it impact the company in the second half? What's the company's view about that?
Okay. You are asking specifically on the impact of the reduction of the IVA on the sales of the dairy product. That is that to the consumer, there is a reduction of 21% of the price that the consumer is paying in the supermarket. For us, there is no impact in our financials and in our taxes because we continue to sell to the supermarket with the 21% of the IVA. The impact is exactly for the consumer. Because of this, we expect that the consumption may increase. If the consumption increases, there is a positive benefit for us as being part of these producers.
Okay. Thank you for the answers.
The next question comes from Pedro Soares with BTG Pactual. Please go ahead.
Hi, good morning, everyone. Good morning, Mariano, Carlos, Renato. I just wanted to make two quick questions here. The first one regarding the evolution of the RenovaBio. I believe the program is expected to start in the beginning of the year. It will be nice to hear and to have an update from you guys at which stage the Adecoagro's mills regarding the certification of the program. If you guys could also share what you're expecting to be generated by the CBIOs and the company's results for next year. The second and last question here, I'd like to discuss about the recent primary election in Argentina and the recent price action reaction of the stock. In our view here, we think the market has been pricing in much more of an impact. We believe it's the actual exposure of your company, of Adecoagro to the country.
It would also be nice to hear your sense of that, if you guys agree, and what do you guys think it could be done in terms of message or also maybe actions regarding the company structure that could be taken to maybe mitigate a little bit of that. Thank you.
Okay. Thank you, Pedro, very much for your question. Renato, can you answer the first question regarding the RenovaBio and where we are there?
Thank you for the question, Pedro. We're very optimistic about the program, the RenovaBio program. The ethanol demand would need to increase more than 7% to meet the carbonization targets until 2028, which corresponds to more than 200 million tons of additional sugarcane. In Adecoagro's case, we expect to have all of our mills certified by the end of September, and we are confident that given the efficiency of our mills with high co-generation rates, high level of mechanization, vinasse concentration, and methane usage, we'll be able to be well-positioned and get one of the lowest carbon emission rates in the industry, which will definitely generate positive results for the company from 2020. It is still too early to give you a final number that will be generated with the CBIOs.
Thank you, Renato. Pedro, regarding Argentina and a reaction on the stock. As I said in the introduction, Argentina is 20% EBITDA and 30% EBIT. I think it's important to have in mind the proportion of Argentina to the Adecoagro as a whole. Having made this clarification, specifically in Argentina, all these situations generate some uncertainties and variability. Our company in Argentina, we are mainly producers of exportable goods, and those exportable goods generate dollars. On top of that, now we have more flexibility because part of what we produce can be diverted into the domestic market, as you've seen in our milk business, that we can shift from the export to the domestic or from the domestic to the export. The same thing is in our rice business. Including this domestic market possibility is more flexibility.
We are mainly producers of exportable goods, but in any case, there is any policy that benefits more the domestic market, we are flexible to maximize domestic market. If the policies are to export more, as of today, for example, with the devaluation, the exports are more profitable in general, we are maximizing exports. As we've always mentioned, and as that is part of our DNA, we've been always focusing on cost of production. We are obsessed on being the low-cost producers of any of these goods that we are producing. That is very important, and that's why we feel we are very well prepared for the different scenarios that happen in Argentina.
Okay, guys. Thank you very much, Renato and Mariano.
Thank you, Pedro.
Again, if you have a question, please press star then one. The next question is a follow-up from Fernanda Cunha with Citibank. Please go ahead.
Hi. Thank you guys for taking my questions again. I just quickly wanted to understand, it seems that you're changing the commercial strategy for ethanol sales. You mentioned that now you're going to carry less inventory, going forward. I just wanted to understand, is this because of some difficulty you're having in hedging the ethanol product, or is it more because you're looking at a lower parity to sugar during the inter-crop season? Thank you.
Okay. Marcelo Sanchez will try to answer your question.
Thank you, Fernanda, for your question. I understand that you're referring to our inventories that were lower by the end of the Q2. The reason for that is we've been able to set at attractive prices in April, but accelerating the pace of our crushing and high ethanol mix. Large inventories were built to be sold throughout the following quarters. It's not a change in the hedging strategy. We have a different selling pace due to the amount of inventories that we accumulate.
Sorry, I was actually referring to a comment you made in the press release where you say, going forward, you intend to have a less aggressive carrying strategy.
Sorry, we were not getting exactly the point of the question. What we are saying is that we may be less aggressive going forward because we are seeing that the prices are already good in terms of the price of ethanol and the excess compared to sugar and the potential growth.
Okay. Thank you. That was very clear.
This concludes the question and answer session. At this time, I would like to turn the floor back over to Mr. Bosch for any closing remarks.
To conclude, I would like to express my gratitude to all of our operational and management team and all the support we are having. I think this focus on becoming the low-cost producers is still the focus we would like to maintain and we will continue to. Hope to see you in our next upcoming event.
Thank you. This concludes today's presentation. You may disconnect your line at this time, and have a nice day.