BrasilAgro - Brazilian Agricultural Real Estate Co Q2 FY2020 Earnings Call

Good afternoon. Welcome to the conference call of BrasilAgro for the results of Q2 2020. We will have with us, Mr. André Guillaumon, CEO; and Mr. Gustavo Lopez, Administrative Officer and Investor Relations Officer. We're informed that the presentation is recorded. The audio results will be presented through the Internet at our site, where you will find also the slides and PowerPoint presentation. Before we continue, we'd like to clarify that any declarations made during this conference call concerning the business perspectives of BrasilAgro, projections, operational goals, financial goals are based on assumptions of the company's Board as well as information currently available. They involve risks and uncertainties and assumptions because they refer to future events, and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions, and other operational factors may affect things in the future and lead to results that may differ materially from what is said here. Now I'd like to pass the floor to Mr. André Guillaumon, CEO, who will begin the presentation. Sir, you may proceed.

Good afternoon. Once again, it's a great pleasure to talk to you and share our results in the quarter, our Q2 2020, with a lot of optimism and many victories. We'd like to begin on Page 2, where we show our numbers and then we will go into detail and detailed explanations of everything that happened this quarter. One of the highlights for you is a revenue of BRL272 million, BRL271.9 million. Net profit is BRL61 million, and adjusted EBITDA is BRL70.7 million. I believe we talked a lot with you about Agrifirma's acquisition. But I'd like to remind those who are not present or did not see the video. We will give you more explanations about the acquisition that we closed last week. We will talk about this. And then the grain plantation. We had an adverse year in some regions with some problems, but now we're having a very promising year as we are optimistic about the yields this year. We're talking about 60,000 hectares of soybeans already harvested in some locations with very interesting yields. We completed the production of sugarcane, and we have an intense ramp-up of productivity with the inclusion of the new operation, the partnership in Maranhão, and we have been growing in productivity. We will go into more detail later on. So these are the highlights for the quarter. So let's talk a little about the Agrifirma acquisition. The company is very optimistic. I believe the investors are also optimistic because we paid BRL31.50 at net asset value. You can see here on the map on the right of Page 3, Agrifirma is very close to properties we have. This proximity will enable us to leverage many synergies. We're working on irrigation now for this project. We always hear that Brazil had a harvest and then came the second harvest; we're having two harvests. And now we will have a third harvest by using irrigation in some regions. So this acquisition holds excellent synergies to the south, as you can see on the map, specifically at a location called Arrojadinho, which is very close to Chaparral Farm. We're very happy with this tremendous challenge. It began from scratch at Chaparral Farm, which had a forest. We had to remove eucalyptus and pine trees, and then we stabilized the results. It started to yield important results, including almost 29 million hectares. By year, it's a region where you face more climate risk. What we want to say here is that these assets already had plantations. We're not beginning from scratch in these 28,930 hectares. Most of this asset is made up of mature areas, so we believe we will reach stable production more quickly. So we're very happy about this. This also increases our shareholder base. We brought qualified investors who came through this, and thus we are working to truly improve liquidity. We have made significant strides over the past few months, but we still need a larger shareholder base. We believe that when we look at the synergies with our neighboring areas, and having made this acquisition at NAV, increasing our base, everything is very positive for the company. We are committed to pursuing other acquisitions as well. Apart from this, we have improved liquidity significantly, and we have broadened our shareholder base. Another aspect is that we had problems with liquidity in the state of Bahia, where we sold some assets. So we're very optimistic and believe a lot in the potential value generation of this acquisition. We know that it won't happen overnight, but we have ensured transparency. All the management of the company is engaged to stabilize this project as quickly as possible. As we mentioned a few years ago regarding the acquisition of Agricolas, which was a challenge, today we will discuss the productivity we will achieve. The only certainty we have is that we will attain our business stability faster than we had projected. Then Xingu, a leasing operation, where we had great surprises in productivity. Last year, we had a challenging but profitable operation. This year, the combination of the sales strategy and productivity have brought us good results. I have no doubt that we will treat this project with the same dedication to extract the maximum potential as fast as possible. Going to the next page. Here, I would like to address a topic that generated numerous inquiries for our Investor Relations department: the issue of bonus subscription. On Page 4, we have a summary of the transaction. We are issuing 5.8 million shares, some of which will remain locked up. We're guaranteeing that current investors will not be concerned about liquidity and that the new shareholders will have their lockup respected. We also had to organize this. Apart from guaranteeing the lockup, we also had to assure liabilities. The company that was sold had a different shareholder base. Our lawyers worked diligently to address this, and we designed a bonus for subscription for foreign shareholders who would not remain in Brazil. I emphasize once again that the bonus of this transaction is not a premium; it's a guarantee instrument to preserve the company's shareholders in terms of liquidity and share price, and to address any contingencies that may arise. The bonus here serves as a guarantee instrument for us. Now concerning the company that was sold: some shareholders chose to leave Brazil. So there's a two-year lockup, and if there are no contingencies, in the future, we will be able to issue these shares—651,000 shares. This is the most important point to be explained. On Page 5, we have a visual representation of how we have generated results for investors. Here, we see year-after-year growth in planted area, reflecting a 12% increase. I'd like to emphasize that with all this incremental growth, we haven't included the new areas from the company acquired, except for the Partnership V where we included 2,800 hectares. This growth in planted area will be even greater in the upcoming years with the new areas included from this acquisition. Here, we can see soybeans at 54,000 and corn at 7,400—a significant difference in relation to the previous harvest, new operations, and due to the challenges of planting that I mentioned earlier. We had issues in November with planting those areas not in the appropriate window, and thus we planted corn. In the second harvest in Xingu, we began planting in October, so we are being conservative. This year, we previously indicated to you that we intend to be more aggressive in the second harvest. The harvest in this region began at the start of January, on January 6. We have substantial areas yet to be planted, and we hold high expectations for the corn harvest. We’ve also been focusing on improving productivity for sugarcane. Page 6 illustrates one of our strongholds generating good operational results. Since we included São José Farm, we previously faced a steep drop in productivity for the company. To give you a sense of the numbers: previously, we had 57 tons, then it increased to 65 the following year, and this year we reached more than 72 tons. You can see the work we performed across these three years. I sincerely believe that next year we will be very close to the numbers detailed in our business plan for sugarcane. It's also crucial to note that in the Midwest, sugarcane has been producing well, which you can observe. The challenge was São José Farm in the Midwest, and we're making progress there. We’re seeing significant growth—almost from 81 tons to nearly 83 tons in one year, which shows we are on an upward trajectory. Moreover, it is important to clarify that what was once a question mark for a few analysts is now generating a key EBITDA on a recurring basis, and we trust that we will achieve higher numbers than we have projected. Moving to Page 7: cattle raising is a tool we use for land transformation to avoid volatility. What we seek is a low-risk activity until we can utilize those areas for planting. We noted a reduction in sales from last year to this quarter and intend to reduce cattle raising further. Nonetheless, we made some acquisitions of cattle at lower prices previously, and now we're seeing gains as we sell them. It’s important to understand that this is a transition phase. Regarding cattle raising, we monitored a GNG (average daily gain). Initially, we projected a daily gain of 97. At the beginning of the rainy season, conditions became volatile, which is when pasture usage begins. Therefore, we did see a weight gain for the cattle somewhat lower than our expectations. Still, the asset appreciated because of elevated beef prices. Hence, the 15% drop we are witnessing in productivity is compensated well by price increases. In the coming months, we expect to see improved gain in weight, but while it's still below our expectations, it's more than offset by the high beef prices. It's important that everyone is aware of this. On Page 8, I emphasize once more: when we analyze the absolute numbers and assess our margins per hectare, you are all familiar with our schedule and the budget that was approved in April. We had to present our most optimistic vision for the harvest year, accounting for exchange rates and commodity prices. All reports indicated an exchange rate of BRL3.8 to a dollar. We sold soybeans, ensuring a margin. We executed multiple operations. As depicted in our current picture, the exchange rate stands at BRL4.12 to the dollar. We have a soybean position in Chicago at 9.60, a stark contrast from the current market situation. The combination of these two factors will yield significant commercial gains for the company, which will be evident in the coming years. Furthermore, at the bottom, regarding corn, this is part of the second harvest in Mato Grosso, and we have guaranteed 55% of the sales at BRL26.50. For Mato Grosso, this operation is highly profitable. As per the visuals, back then, the price was BRL17 when we prepared the budget. Therefore, we were aggressive in seeking to improve profitability, and consequently, the second harvest is expected to uplift results this year. These are the large numbers. Now I pass the floor to our CFO, who will present our results.

Good afternoon. Thank you for participating. Gustavo Lopez. Let's see what happened with the company's EBITDA on Page 9. We have— as you know, we follow accounting norms, so we have an adjusted EBITDA, and we can see here the gains in terms of sugarcane and cattle and soybean; you have the results available. This highlights the numbers as we sell corn from the previous harvest. Here, it is essential to mention that we have here six months' worth of data. In this EBITDA, we see a combination of operations. In the first six months, we sold the inventory of grains, along with 80% of the sales from sugarcane. Thus, for the six months ending in December, we report adjusted EBITDA of BRL70 million. Last year, during the same period, it was BRL153 million. The main difference stems from real estate sales. Last year, we recorded a sale of Chaparral Farm with an accounting profit, but this year, we sold a smaller portion of the same property, reflected in this period’s results. This gives us a result of 1.4. When assessing the EBITDA for the quarter, we have a result of BRL7.7 million negative. Last year, sales figures were at record levels. This year, as well, our sales are aligned with the budget, but as André mentioned, we had results in soybean and corn. In September 2019, we recorded $23 million at an exchange rate of BRL3.97 to $1. Now the rate has risen to BRL4.12, resulting in a significant impact on adjusted EBITDA. Moving to Page 10, our adjusted EBITDA for six months stands at BRL49.9 million, almost BRL50 million. Last year, it was BRL46 million. The key reason for this increase lies in the remarkable harvest experienced in sugarcane, exceeding our earlier estimates. Sugarcane productivity has been notably high, especially at São José Farm, yielding an additional 900,000 tons this year alone. We are wrapping up this harvest with a 6% increase relative to last year. Moving on to Page 11, we overview the results where you can observe profits and how they differ from last year. The positive impact came from the sale of soybean, corn, and sugarcane, alongside increased production levels. A notable mention is that administrative expenses increased by 11%. We had tax payments during this period. On Page 12, we see the main lines showcasing asset growth and liabilities, consistent with the growth we’re witnessing. As for cash, we are positioned around BRL100 million, maintaining long-term debt at BRL280 million, and the company enjoys net cash at BRL880 million. It’s important to emphasize that we are actively managing sales; we have conducted transactions that are still pending receipt of payment. This leads us to observe our leverage. The farms comprise BRL551 million. The current reserves and results show a solid financial footing. Here, we also note that these figures do not include the recent transaction since it was finalized in January 2020. On Page 13, we display the debt situation of the company, distinguishing between long-term and short-term increases. We anticipate payments becoming due in July 2020, this is being treated as a short-term liability while maintaining cash levels between BRL112 million and BRL113 million as net debt. Presently, our average cost of debt remains at 5.6%, with favorable interest rates. We are now evaluating potential farm acquisitions, as historically, higher interest rates of around 12% impeded such opportunities. Now, we can leverage the company further, thanks to reduced interest rates. On Page 14, we see significant potential and upside. The average share price closed yesterday at BRL19.64, while our shares are now close to BRL31. So until now, we have yet to factor in certain values, including net taxes. We'd also like to remind everyone that the figures presented here do not account for the recent acquisition, as that deal only closed recently in January. To conclude on Page 14, we observe the behavior of our shares. We are very pleased with how our shares have been received in the market; this is a testament to the efforts we've put in to deliver results consistently. We feel that we now have an immense potential to build on. We'd like to express our sincere gratitude to you and now like to begin the Q&A session.

Well, we'd like to thank you all for your attention. We are completely committed to delivering consistent results more and more. We've worked diligently to achieve this, and we are seeing recurring results. We had a challenging year impacted by many external factors, including the coronavirus. So we have continually protected the company from market fluctuations, especially last month. We are confident that we will deliver consistent results. We believe that operational results will be very robust this year, as highlighted in real estate terms. Brazil will experience a super harvest, and our capitalized liquidity is solid in the market. We're actively pursuing transaction sales and believe firmly that this year, we will yield a positive combination of results. Last year, the values related to real estate were higher, but this year we anticipate positive contributions across both operational and real estate elements. Thus, we remain very optimistic. The harvest is presently underway, and we are marking a trajectory of excellent growth, with outstanding productivity in the Northeast. Despite facing some early harvest challenges, we are now consistently delivering with extremely interesting volumes. Therefore, we remain very optimistic. Thank you very much for your trust, and you can count on us to deliver these results.

The conference call of BrasilAgro is concluded. Thank you for participating. We wish you a good afternoon.