Adecoagro SA (AGRO) Q1 2019 Earnings Call Transcript

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Adecoagro SA (NYSE: AGRO)Q1 2019 Earnings CallMay 22, 2019, 9:00 a.m. ET

Contents:

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  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to Adecoagro's First Quarter 2019 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 listen-only mode during the Company's presentation. After the Company's remarks are completed, there will be question-and-answer session. (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 would like to turn the conference over to Mr. Mariano Bosch, CEO. Mr. Bosch, you may begin your conference.

Mariano Bosch -- Chief Executive Officer & Co-founder

Good morning and thank you for joining us Adecoagro's 2019 first quarter results conference. As you may have seen in our release, we continue delivering strong financial and operational results, while we complete the final development of our growth plan. In such a complex and changing global context, this achievement as a result of our focus to increase efficiencies in our production which in turn translates into a reduction of cost.

As we always trace out, we find this the only sustainable way to be the low cost producer and generate stable and effective return throughout the commodity cycle.

In our Sugar Ethanol & Energy business, we continued to maximize ethanol production in order to profit from higher relative prices. During the quarter, virtually all the TRS produced was delivered to Ethanol, considering that we traded at more than 20% average premium to sugar during that quarter. This represents a clear competitive advantage compared to the other player. At the same time and thanks to the ongoing industrial enhancement, we expect production mix to reach as high as 80% ethanol for the whole year.

Harvesting and crushing operations are moving forward as expected. Given the current moisture conditions of the plantation as a consequence of the low rainfall, we have slightly reduced the crushing pace in order to give the cane more time to develop and therefore enrich in TRS content.

Assuming normal weather conditions going forward, we expect to crash around the 12 million tons targeted. This would result not only in further cost dilution, but also higher energy production. Indeed, this quarter we recorded 73 kilowatt hour per ton crushed. As for our expansion project, sugarcane availability is the critical factor, especially for our non-stop harvest system. We have successfully secured over 90% of the total hectares needed to fully supply the 3 million tons of -- growth of crushing capacity. More importantly, terms and conditions were maintained, in some cases even improved.

Moving to our Farming and Land Transformation business, it is all set to be a strong performing year. Starting with the crops; as the end of April 2019, harvest operations are well under way. Crops are delivering good results with above expected yields. We have already up and running our brand new grain handling and conditioning facility that will allow us to maximize our efficiency.

Weather conditions for peanuts were favorable, and we expect to generate strong financial results considering that. After the acquisition of the processing facility, we will be not only saving those in agreement but also getting higher selling prices.

Regarding our Dairy operation, we continue delivering strong operational results. Cow productivity continues to be extremely high even factoring for the new operational challenges that arise as we populate our third free-stall facility. Going downstream, processing activities are fully under way and generating strong results.

Our production flexibility enables us to maximize return based on relative profitability. Most of our production is devoted to the local markets since current market conditions dictate that better margins can be achieved in the authentic market versus export.

In our Rice business, all the enhancements we've been attaining over the last couple of years are paying off. The mills are operating very efficiently and processing 50% more rough rice than last year. This coupled with our commercial effort to segment the market to increase selling prices, explain the better financial performance of the business.

As a summary, so far this has been a very good start of the year. We believe we are on the right track to conclude another solid fiscal year, generating attractive returns.

Now Charlie will go through the numbers of the quarter.

Carlos A. Boero Hughes -- Chief Financial Officer

Thank you, Mariano. Good morning, everyone. Let's start on Page 4 with a brief analysis on the rains in Mato Grosso do Sul. As you can see on the top chart, weather has been dry over the last month. Indeed, rains reached 510 millimeters in the first quarter of 2019, 30% lower compared to the same period of last year. As a result, we decided to fine tune our harvest schedule in order to maximize cane productivity throughout the year. Specifically, we slowed down the pace of crushing during the first quarter, explaining the 11% decrease in crushing activities.

We expect that this strategy will allow the cane to further grow and benefit from normalized rains during March and April. It's worth noting that even though total rains were 30% lower year-over-year, effective milling days remained unchanged. This is fully explained by the frequency and distribution of the rain.

Please jump to Page 5, where I would like to highlight our agricultural productivity. In spite of dry weather during summer months, sugarcane yields during the quarter reached 92 tons per hectare, significantly above the five year average yields for Brazil's center-south region. This is the result of ongoing focus on enhancing sugarcane quality and agricultural performance. Yields felled 14.3% compared to our yields in the first quarter of 2018 as a result of above average rainfalls during November of 2017 through February 2018.

In terms of sugar contents, TRS during the quarter reached 107 kilo per ton in line with the same period of last year. And combination of these two effects resulted in TRS production per hectare of 9.9 tons, 15% lower year-over-year.

Let's move ahead to Slide 6, where I would like to discuss our production mix. As you can see on the top left chart, during the first quarter of 2019, Anhydrous and Hydrous Ethanol in Mato Grosso do Sul traded at an average price of $0.157 and $0.154 per pound sugar equivalent, which represent a 22% and 24% premium to sugar, respectively.

Production during the quarter was fully devoted to ethanol. Indeed, 97% of the extracted sugarcane juice was shifted to ethanol, an all-time record. 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 87% of the total first quarter '19 EBITDA generation in the Sugar Ethanol & Energy business, while sugar accounted for 4%. This is a significant competitive advantage, since it enables us to maximize returns by selling the product with the highest marginal contribution.

Let's please turn to Slide 7, where I would like to discuss quarterly sales. As you can see on the top left chart, Ethanol sales volumes increased by 19.2% compared to the first quarter of 2018. Lower crushing volumes were fully offset by the 11.4% increase in the alcoholic mix coupled with larger inventories carried from the previous quarter.

Average selling prices measured in US dollars however fell to $0.124 per pound 20.5% lower year-over-year as a result of the depreciation of the Brazilian real. All in all, net sales reached $62.8 million, marking at 6.1% reduction. In the case of Energy, selling volumes reached 115,000 megawatt hour marking a 60% increase, as you can see on the mid-left chart. This was related to our commercial strategy to export as much Energy as possible to the grid during the first quarter of 2019 to capture higher energy prices.

Cogeneration efficiency during the quarter reached 73 kilowatt hour per ton crushed. Average selling prices measured in dollars reached $73 per megawatt hour, marking a 30% increase compared to the same period of last year. Given that hydroelectric energy accounts for almost 60% of the Brazilian energy matrix, energy prices are very much correlated to rain. In this line, dry weather acted as a catalyst for prices.

Sugar Sales volumes were 32,000 tons, 41.2% lower than the first quarter of 2018. Average net selling prices reached $0.151 per pound, 7% lower compared to the first quarter of 2018. Lower prices are primarily explained by global supply and demand dynamics. As a result, net sales reached $10.7 million, 45% lower compared to the first quarter of 2018.

Finally to conclude with the Sugar, Ethanol & Energy Business, please turn to Slide 8, where I would like to discuss financial performance. As shown on the left chart, total production cost, excluding depreciation and amortization reached $0.086 per pound, 6.7% lower year-over-year. It was mainly explained by enhanced agricultural efficiencies that contributed to reduce harvest cost; lower industrial cost obtained from industrial operational efficiencies; lower cane depreciation, partially offset by lower crushing volumes.

Unit costs measured in US dollars were further reduced by the year-over-year depreciation of the Brazilian real. Lower costs of production, however, were fully offset by the $26.3 million difference registered from the mark to market or commodity hedge positions. This mainly explains the 35% lower adjusted EBITDA compared to the first quarter of 2018.

I would now like to move on to the farming business. Please direct your attention to Slide 10. During the second half of 2018, we began our planting activities for the 2018 and '19 harvest year. Planting activities continued throughout early 2019, and as of the mid of May, we have seeded a total of 232,000 hectares. Owned croppable area reached 113.5 thousand hectares, 9.1% or 11.4 thousand hectares lower compared to the previous seasons. This is mainly explained by the sale of Rio de Janeiro and Conquista farms during the second quarter of 2018. Leased area, which varies in size on the basis of return on invested capital has increased by 19.8% reaching 86.4 thousand hectares.

Let's move to Page 11, where I would like to walk you through the financial performance of our Farming & Land Transformation businesses. Adjusted EBITDA in the Farming & Land Transformation businesses was $31.9 million, $13.1 million or 70% higher year-over-year. Improvement in financial performance is primarily explained by the higher margins in our Rice and Dairy businesses.

In the case of the Rice business, higher margins were explained by cost dilution following the depreciation of the Argentine Peso, higher selling volumes as we carried stock from the previous quarter coupled with enhanced agricultural and industrial efficiency.

Regarding our Dairy business, higher selling volumes and average prices were responsible for the increase in financial performance. Indeed, as a result of the shortage of milk due to weather related issues, prices increased, enhancing margins. Our confined free stall system was not affected, allowing us to fully profit from higher prices. Lastly, during January 2019, we completed the sale of Alto Alegre farm located in Tocantins for $16.8 million to be paid in seven installments. This transaction generated an EBITDA of $9.4 million.

Let's move to Page 12, where I would like to walk you through our Land Transformation business. As previously mentioned, in January of 2019, we completed the sale of Alto Alegre Farm located in Tocantins, Brazil. The aggregate selling price reached $16.8 million for a total of 6,080 hectares, from which 3,065 are croppable.

I would like to highlight that the farm was sold at a 33% 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 into highly yielded activities, enabling us to continue growing and enhancing shareholder value.

Let's now turn to Page 14, which shows the evolution of Adecoagro's consolidated operational and financial performance. Net sales in the first quarter of 2019 reached $154 million, 4% higher year-over-year. This is mainly explained by the combination by higher sales on the Rice and Crop businesses, as a result of higher selling volume, partially offset by lower Sugar & Ethanol selling volume coupled with lower Sugar & Ethanol prices, measured in US dollars.

Adjusted EBITDA totaled $58.3 million, marking a 6% decrease compared to the same period of last year. 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 US dollars.

These positive results were more than offset in our Sugar, Ethanol & Energy business, mainly driven by the $26 million lower gain registered from the mark to market of our commodity hedge position coupled with lower crushing volumes.

To conclude, please turn to Slide 15 to take a look at our net debt position. As you may see on the left hand chart, our gross indebtedness as of March the 31st of 2019 stands at $886 million, while net debt stands at $729 million, 13% 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 which were mainly financed with cash from operations. Net debt ratio reached 2.34 times, 6.8% higher year-over-year. I like to mention that our debt is well structured in the long run with an average maturity of over six years.

Thank you very much for your time. We are now open to questions.

Questions and Answers:

Operator

Thank you. The floor is now open for questions. (Operator Instructions) The first question today comes from Roberto Browne with Morgan Stanley. Please go ahead.

Roberto Browne -- Morgan Stanley -- Analyst

Hi, good morning. Thank you for the question. My first one actually is on the smaller businesses that are gaining more importance. So I just wanted to understand what can be the recurring level of EBITDA in a year from a rice and dairy. In rice, it will be interesting to understand how much of the EBITDA in this quarter came from the actual higher processing capacity and how much from the sales of inventories that came from last year?

And in Dairy, if possible to get an update on how the SanCor acquisition is evolving, the turnaround of the assets and what we can expect on that division as well.

And my other question would be on CapEx. The first quarter was a bit more intense than we expected. So just wanted to get an update on your expect -- the expectation for the year. Thank you.

Mariano Bosch -- Chief Executive Officer & Co-founder

Hi, Roberto, thank you for your question. Number one, on Rice, that was your question. How much of the EBITDA coming from last -- from the previous year, and how much of the specific quarter? As we mentioned in the fourth quarter of '18, we reduced EBITDA of rice and we were selling part of the stocks in the first quarter. So I would say that half of the EBITDA is coming from the previous year and the other half is -- has been generating during this quarter.

As we've mentioned, all these enhancement that we've been doing on the rice operation is making us more profitable on this segment and consistently more profitable. So, we should continue to expect improvement quarter-by-quarter in this specific segment of rice where we are -- I'm kind of optimistic it's doing well.

Then, on your second question in terms of the Dairy operation, as we explained in our five year plan, we have our production operation and in terms of the production, we are doubling our production capacity. So if you look at our numbers in 2017, we can expect to double that situation once we finish our five year plan.

If you remember in '17 we made $12 million of EBITDA in the Dairy segment. So we can expect in '21 or '22 when this is finished, to double that EBITDA capacity generation. So that would be talking about $24 million or $25 million of EBITDA coming from the production only, and that is in line with what we share at the Adecoagro Day. Then, we have these plants that we just acquired. And as we explained in our previous call, we expect to generate once in full capacity on, our expected capacity this $10 million to $12 million of EBITDA that is for 2021.

How are we doing today on that projection? We are taking over the plants at a better situation than what we originally expected. We are being able to control costs. That was what our first focus, very, very well, and we are also obtaining this flexibility that we expressed or was part of our strategy, to be able to either export or use the milk for the -- the processed milk for the domestic market.

So as you know, we have this two plants, where one of the plants is in the center of the dairy basin that is mainly to produce powder milk and cheese, where powder milk is mainly for export and cheese is both in export or domestic market. And the other plant in Chivilcoy, near the main consumption center of Buenos Aires that is devoted to fluid milk.

Today, in the month of May, we are maximizing the domestic market, within our flexibility we originally thought that because of the weakness of the peso in Argentina, we were going to be more export driven, but the domestic markets are paying more, so we are maximizing the domestic market and getting a premium.

So today, the month of May, we are going to be positive EBITDA. This is the first month that we will be fully -- we are not reaching our expected capacity, we are processing 400,000 liters per day while we expect to go to 1 million liters per day. So with only 40% of what we are expecting, we are already at EBITDA positive. So these are clear good news in terms of all our strategy on the dairy business. So I can just -- as I just explained, the overall dairy segment is becoming relevant and will become relevant as part of this five year plan expansion as we explained before.

Then finally, on your third -- on the third part of your question, that is this CapEx or -- that we are doing and it's a heavy CapEx during this first quarter is as we expected, part of this CapEx are the closing of these two dairy plants were expecting for the end of last quarter, we ended up closing at the beginning of this years. So that's why the expected -- the CapEx is higher to what some people expect but not to what we were expecting. So it's clear that we are exactly in line to what we were projecting. So in terms of CapEx what we are doing is pretty much in line with all our five-year plan.

Roberto Browne -- Morgan Stanley -- Analyst

Very clear, thank you Mariano.

Mariano Bosch -- Chief Executive Officer & Co-founder

Thank you, Roberto.

Operator

The next question comes from Fernanda Cunha with Citibank. Please go ahead.

Fernanda Cunha -- Citibank -- Analyst

Hi good morning everyone. So I had two questions, the first one is a follow up of Roberto's question on CapEx. As far as I recall, your CapEx for the year is a total of $250 million. But what surprised me was the amount of maintenance CapEx spent in this quarter, you spent around $90 million maintenance CapEx in the first quarter, while last year for the full year you only spent a $150 million. So can we expect any run over in the maintenance CapEx or by the next quarters, we should reduce that drastically. And I'm just wondering whether we should maintain the budget of $250 million of CapEx for this year?

Second question on this point is, if you're maintaining a CapEx of $250 million for this year in order for you to achieve a net debt/EBITDA of around 2 turns, EBITDA would need to grow at least around 10%, if these numbers hold right. And also at 2 turns, can you talk about capital allocation and shareholders return.

And the third question -- sorry, I have one more. Can you comment how much was the cost per pound recurring effect quarter -- year-over-year sorry? We have this first quarter devaluation effects and also cost of -- corn prices coming down. So I'm just wondering whether this 6.7% drop, how much of it would actually be on a recurring basis, based on your initiatives on improving efficiency. Thanks a lot.

Mariano Bosch -- Chief Executive Officer & Co-founder

Hi, Fernanda. Thank you for your questions. Charlie will answer your first and your second question regarding the CapEx and the net debt to EBITDA.

Carlos A. Boero Hughes -- Chief Financial Officer

Hi Fernanda, regarding the maintenance CapEx, we are still forecasting our $110 million to $150 million (ph) for the 2019 year. You know that seasonality impacts more in the first four or five months of the year, especially on the Sugar & Ethanol business.

We do all the maintenance of the boilers and the industry during the first four months, and this specific year, as we explained in the release, because of a little bit drier weather than normal, we are pushing forward the sugarcane crush into the year, so taking advantage of more days that we are not working to advance capital funds, the expense is on maintaining CapEx. That's why you see a higher figure in this first quarter compared to 2019(ph). And to finalize the answer of your question, we continues to forecast that $240 million, $250 million of maintenance CapEx and expansion CapEx for this fiscal year.

Mariano Bosch -- Chief Executive Officer & Co-founder

Thank you, Charlie. If those two first questions are clear then I'm going to ask Renato to answer the cost of the sugarcane.

Fernanda Cunha -- Citibank -- Analyst

The other question I had on the CapEx was around, does it seem right, I mean it seems strong EBITDA growth for you to maintain 2 turns net debt to EBITDA level. So can you comment on how can we expect shareholders' returns for this year in terms of dividend and share buyback? And if I may, just on your comment, you said maintenance CapEx for this year is around $110 million to $120 million, can you explain what drove down year-over-year maintenance CapEx? Thanks.

Carlos A. Boero Hughes -- Chief Financial Officer

Well basically, Fernanda, maintenance CapEx, it's 90% related to our Sugar & Ethanol business. And I need to say that 96%, 97% of all these expenses are in domestic currency in Brazilian reais. As we've been seeing some devaluation of the local currency, what we show the maintenance CapEx this year compared to last -- to last first quarter of 2018 there's a dilution in terms of US dollars. That's what explains mainly the difference in reduction.

Mariano Bosch -- Chief Executive Officer & Co-founder

Okay, so I'm going to pass the word to Renato to answer the cost of the sugarcane and what we can expect of the cost of producing the sugarcane.

Fernanda Cunha -- Citibank -- Analyst

Sorry, and the net debt -- and sorry the other part on the net debt to EBITDA levels, can you comment on that and (multiple speakers).

Carlos A. Boero Hughes -- Chief Financial Officer

Yeah, actually, if you look at the net debt as of the end of the first quarter, from a seasonality point of view, it's a quarter where we have the most level of leverage as a consequence of having the crops most of them at the fields, so not being able to harvest because of the seasonality. We start -- the more, the higher speed is in the second quarter for corn and soy mainly and peanuts. So that requires working capital so we are not -- we have not been harvesting, selling and collecting.

Then you have to -- also to consider that this is the quarter where we have the lowest base of sugarcane crushing as we said and the highest maintenance CapEx expenses concentrated in the first four to five months, particularly during this first quarter of 2019, we have to add the cash that we spend for the acquisition of the two processing plants which also implies additional working capital as we are selling the already value added products produced into the market and the payment of the acquisition of the Peanuts processing plant together with a significant increase on the peanuts crop area that moved from 6,000 to 10,000 hectares. All of this obviously is within our five year plan as Mariano was explaining. So although we are presenting today at 2.3 times net debt-to-EBITDA ratio, we expect that we will be finishing the end of the year at levels of around two times.

Mariano Bosch -- Chief Executive Officer & Co-founder

Is it OK, Fernanda?

Fernanda Cunha -- Citibank -- Analyst

Yes, yes, that is great.

Mariano Bosch -- Chief Executive Officer & Co-founder

Okay, so now we go do the expected cost of production on our Sugarcane production.

Renato Junqueira Santos Pereira -- Director of Sugar & Ethanol Operations

So regarding the cash -- the production cost, we expect cash cost, net of energy, between $0.09 and $0.095 per pound.

Fernanda Cunha -- Citibank -- Analyst

Okay. Thanks a lot guys.

Mariano Bosch -- Chief Executive Officer & Co-founder

Okay, thank you.

Operator

The next question comes from Thiago Duarte with BTG. Please go ahead.

Thiago Duarte -- BTG -- Analyst

Hi, good morning. Good morning, Mariano, Charlie, Renato. Good morning everybody. I have two quick questions actually on the Sugar, Ethanol & Energy business. The first one is, it's actually very clear why you delayed the crushing pace in the first quarter, and if I understood correctly, you still expect -- you still have the same expectation toward the full year crushing volumes in spite of the delays in the first quarter. So actually, just if you could remind us what is your expectation for the full year crushing volumes and your expectation for next year once you complete the vast majority of the CapEx for the expansion of the Ivinhema mill?

And the second question is regarding mix. I mean just like the rest of the industry, Adecoagro also focused on increasing the production of ethanol at the expense of sugar last year, we've seen over the past few months an increase in oil prices globally. Ethanol is proving to be very resilient in the beginning of the crop, as we look in the -- into prices of the last few weeks. So my question to you would be whether you still expect to increase the sugar blend or the recent movements would suggest that we could still see a maximization of ethanol output at the expense of sugar in this year? So that would be my two questions. Thank you.

Mariano Bosch -- Chief Executive Officer & Co-founder

Thank you, Thiago, a good question. I'm going to ask Renato to elaborate more on those questions?

Renato Junqueira Santos Pereira -- Director of Sugar & Ethanol Operations

Hi Thiago, as it was mentioned by Charlie, the decision to slow down the crushing pace was taking to help the development of our sugar cane fields, which improved the sugarcane outlook for the rest of the year and increased our ethanol mix in the first quarter. The delay represents only three effective crushing days which can be easily eliminated. Therefore, considering a normal weather from now on, we should be crushing about 12 million tons in the whole year. And for next year, we expect to crush 12.5 million to 12.7 million tons of sugar cane.

Regarding the mix, considering that the TRS quantity increase in the coming months and you'll be speeding up the crushing pace, it's very difficult to maintain the same ethanol mix of the first quarter. However we are positive that we will achieve an ethanol mix of about 80% in the year. It represents an increase of 5% compared to last year and it's much higher that the Brazilian average of 64%. And we are -- I think this is a very good news, because we are very positive with ethanol view and we are very conservative with this view because of the combination of the higher -- high gross markets share increasing auto cycle demand, any stagnant production should lead to a tight S&D in 2019.

In our view, parity at the pumps you need to stay above 2018 levels to curb demands and consequently lead to higher ex-mill (ph) prices and better profitability of the mills (ph). In addition a more positive oil scenario already led Petrobras to increase gasoline in margin 25% since January, helping to support our positive view.

Thiago Duarte -- BTG -- Analyst

Thank you Renato, very helpful. And then just if I could a follow up question on your crushing numbers, so you said next year you could expect to be crushing between 12.5 million to 12.7 million tons if I understood correctly what was --

Renato Junqueira Santos Pereira -- Director of Sugar & Ethanol Operations

Yeah, this is correct but it is too early to say a number because it depends a lot of and (multiple speakers) but just as an initial idea.

Mariano Bosch -- Chief Executive Officer & Co-founder

On the plants being (multiple speakers) on the planting, we are doing pretty well. That's why we are so optimistic on our future production.

Thiago Duarte -- BTG -- Analyst

Perfect. Yeah. My follow up question was just going to be on your nominal crushing capacity. I mean, I have in mind that after the completion of the brownfield expansion we should be working with something closer to 13 million tons as a nominal crushing capacity. Just want to make sure is that looking two years ahead or three years ahead you still see this number as feasible. I see you're going to be -- you expect to be coming very close to that next year. But just to make sure we are working with the right crushing curve here.

Renato Junqueira Santos Pereira -- Director of Sugar & Ethanol Operations

Yeah, this is a right number for Mato Grosso do Sul cluster and then you have to add 1 million tons of Usina Monte Alegre, so the total is going to be 14 million tons that is going to be reached in 2022.

Thiago Duarte -- BTG -- Analyst

Great. Thank you.

Mariano Bosch -- Chief Executive Officer & Co-founder

And it's to be reached according to the amount of sugarcane that -- or the availability of the sugarcane that is the key factor that we are planting today. Thanks

Thiago Duarte -- BTG -- Analyst

Thank you.

Mariano Bosch -- Chief Executive Officer & Co-founder

Thank you, Thiago.

Operator

(Operator Instructions)The next question comes from Gustavo Allevato with Banco Santander. Please go ahead.

Gustavo Allevato -- Banco Santander -- Analyst

Hi guys, just a follow up of previous question, I didn't get the answer exactly. So, what's the target of leverage should be done by end of this years. And can we expect the Company to announce a dividend policy eventually in the second half given the investment cycle is almost concluded so it'd be very helpful if you could give me some color on these two topics. Thank you.

Mariano Bosch -- Chief Executive Officer & Co-founder

Thank you Gustavo, as Charlie mentioned, around two times EBITDA is what we expect by the end of the year. That is also within our target. That is what we expect. As regarding the dividend policy, we clearly explained last quarter that on top of the five year plan, we don't have any specific plan to continue with a heavy investment. So we plan to return money to shareholders once we have the free cash flow positive. That is not going to be in 2019. It's going to be, very well expressed in 2021; and 2020 is the year where we turn into cash flow positive.

So, in the second half of this year we can -- we are currently discussing within our management and Board what is going to be our policy on how to return this capital to shareholders. So, by the end of this year, we can be talking to the market on how we see that we are going to be distributing this cash to our shareholders. But we need to have this clarity of 2020 and how we moved into the 2021 where the numbers are very clear to be free cash flow positive.

Gustavo Allevato -- Banco Santander -- Analyst

Very clear, thank you guys.

Operator

The next question is a follow up from Roberto Browne with Morgan Stanley. Please go ahead.

Roberto Browne -- Morgan Stanley -- Analyst

Yes, thank you for taking my -- another question. I just wanted to understand is the fact that you have no hedges for sugar for this crop is more related to your ethanol mix or it's more strategic in terms of waiting for a recovery and your view on prices. Thank you.

Mariano Bosch -- Chief Executive Officer & Co-founder

Sorry, Roberto, just to clarify, you are asking about the hedges of 2019 or 2020, for the next year or for this year?

Roberto Browne -- Morgan Stanley -- Analyst

For this year I see for (multiple speakers)

Mariano Bosch -- Chief Executive Officer & Co-founder

Okay, this year we have 60% already hedged that has been previously hedge. That is for 2019 harvest that is happening. From -- for 2020 harvest, we already have 10% already hedged at $0.14.

Roberto Browne -- Morgan Stanley -- Analyst

Okay, I just see in the release that for the '19, '20 harvest at least as of the close of the quarter there was nothing hedged, right. So now I understand you advanced a little bit.

Mariano Bosch -- Chief Executive Officer & Co-founder

Yes, that's right.

Roberto Browne -- Morgan Stanley -- Analyst

And indeed the fact that there is not much of volumes hedged is really related to the focus on Ethanol, right, and since you're going to be doing such a strong ethanol mix, it doesn't make sense to invest too much in sugar and that could be a risk, depending on -- also on whether and your -- and agricultural use, right?

Mariano Bosch -- Chief Executive Officer & Co-founder

Yes, Roberto you are right in what you're saying. Also I would like Marcelo Sanchez to share our review on sugar prices specifically.

Walter Marcelo Sanchez -- Chief Commercial Officer & Co-founder

Hi, Roberto, just to clarify the hedges, we have hedged 2019, 60% already at level prices of $14.70 and we have hedged as of today 10% of 2020 at $0.14 per pound level. Regarding the sugar price view, we expect prices to stay within a range of $0.11 and $0.13 per pound for the short term and this is because if sugar prices rally (inaudible) last year, we'll be switching into sugar production increasing the global surplus and pressuring prices. On the other hand, the downside potential to be relatively limited as farms are holding a very large surplus this year on the growing risk of a poor monsoon in Asia to curb the interest in increasing their position much further.

For the medium term, in the Q4, we are more price friendly. The perspective of lower crops in India and Thailand and in the European Union will mean tighter S&D and creating a more favorable environment for sugar prices. That's our -- that's the way that we are looking at the market as of today.

Roberto Browne -- Morgan Stanley -- Analyst

Very clear thank you Mariano and Marcelo.

Mariano Bosch -- Chief Executive Officer & Co-founder

Thanks Roberto

Operator

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.

Mariano Bosch -- Chief Executive Officer & Co-founder

As you have seen in our report, we have had a good start of the year. We have a lot of challenging projects ahead that will continue to contribute to our growth and enhance our production efficiency. Before we close the call, I would like to reiterate 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 lowest cost producers in the entire world; while at the same time generate attractive and sustainable margins for our shareholders.

Thank you for your support and confidence. Look forward to seeing you in the upcoming IR events.

Operator

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

Duration: 49 minutes

Call participants:

Mariano Bosch -- Chief Executive Officer & Co-founder

Carlos A. Boero Hughes -- Chief Financial Officer

Renato Junqueira Santos Pereira -- Director of Sugar & Ethanol Operations

Walter Marcelo Sanchez -- Chief Commercial Officer & Co-founder

Roberto Browne -- Morgan Stanley -- Analyst

Fernanda Cunha -- Citibank -- Analyst

Thiago Duarte -- BTG -- Analyst

Gustavo Allevato -- Banco Santander -- Analyst

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