Earnings Call Transcript - LND Q3 2023

Operator, Operator

Good afternoon. We are here for our conference call for the earnings of BrasilAgro. We will be talking about nine months that ended on March 31st, representing Q3 of the year that ends on June 30. And I am here with our CEO, André Guillaumon; and our CFO, Gustavo Javier Lopez. And the announcements, if you wish to ask questions, please click on chat. If you want to send questions in writing, you can send through the platform. We are all connected. For those who are hearing us in English, the presentation is available in the chat in the English version. Once again, thank you for participating and I will pass the floor to André to begin to talk about what happened in this quarter. Thank you. Okay, André, you have the floor.

André Guillaumon, CEO

Thank you, Ana. Good afternoon. It's a pleasure to be here with you again. Understanding an agricultural company can be complex each quarter, and it's beneficial to look at the entire year as well. However, we will focus on this quarter’s developments, discussing the company's operations, workforce development, and other key points, while also ensuring there's ample time for your questions. Starting with the first page, over the first nine months, we reported net revenue of R$663 million and a net profit of R$25 million, with adjusted EBITDA at R$168 million. Operationally, we achieved nearly 100% of our soybean harvest in Brazil, totaling approximately 203,000 tons across Brazil, Paraguay, and Bolivia. Despite it still being early April, we made a significant sale of the remaining part of Araucária Farm, and as you will see in the annual figures, this will greatly enhance our results. On the next page, I want to provide a bit more detail regarding the farm sales. We sold the remaining part of Araucária Farm, and I want to clarify the notable price differences between the two areas sold. One area is lower-lying with sandy soil previously used for sugarcane, while the other has mixed soil conditions. We managed to monetize these effectively. The more significant sale was from a lowland area yielding 300 bags, which is suitable for pasture or sugarcane but carries more risk for grain production. The other area had varying productivity, calculated at 1,300 bags per hectare. Overall, of the total 3,796 hectares, the average was 790 bags per hectare from a mix of these soil types. The first sale represents a recurring result from our transaction that started in 2006, with the final divestment occurring in 2023, yielding nearly a 14% return in lowland areas and 15% for the entire farm. This showcases our ability to align operational performance with farm sales. For context, the farm was initially acquired in April 2007 for under R$76 million, including CapEx for transformations. While we transformed part of the farm, most of it was already improved, totaling R$602 million in sales, reflecting years of positive cash flow. This substantial return underscores our capability to operate effectively and seize market opportunities. For the second sale, we experienced challenges this year compared to last. We aimed to negotiate favorable prices while shortening payment terms because we understand the soybean prices are likely to decline. On the next slide, we’ll discuss key projects funded by investor capital. We are undertaking significant structural changes, including connectivity projects, an ERP upgrade to SAP, and a new seed production plant focused on soybean seeds for our consumption, enhancing cost efficiency and standardization. In irrigation, especially at our Sao Jose site in Bahia, we are making investments to improve yields in sugarcane production, implementing pressurized irrigation and expanding pivot installations. We are also transforming three areas in our portfolio; for instance, Panamby Farm, which wasn't fully utilized this year, is set to be fully operational next harvest. In total, we are adding about 15,000 hectares to our production base in the state of Mato Grosso. In the next slide, we’ll review our harvests. Currently, 97% of our soybean harvest is complete, 6% of corn, and we expect to harvest cotton at the end of May to early June in Bahia and later in Mato Grosso. We see a 7% decrease in soybean productivity due to reduced area and other factors, including drought impacting our units in Bahia. Nonetheless, despite challenges, we remain less reliant on those regions than in the past. Moving on to derivatives, our current harvest is nearing completion, with 12% already sold at a rate of R$5.73 to the dollar, while the upcoming harvest is projected at R$5.38. The average selling price for soybeans has seen fluctuations, and we are actively managing our receivables from farms. In summary, our results reflect both challenges, such as reduced productivity due to environmental factors, and opportunities with strategic sales and investments. Gustavo will now take over to delve deeper into the numbers and explain our financial performance.

Gustavo Javier Lopez, CFO

Thank you, André. Good afternoon to everyone on the call. Let's go over the key figures. We will review the nine months ending March 31st, as our fiscal year starts on July 1st. We report a net revenue of R$663 million, influenced by the same factors discussed in the previous quarter. The company has sold the remaining stock from the last soybean harvest, totaling 203,000 tons. This is what we anticipated; nearly everything has been harvested, and we expect to process 120,000 tons of corn followed by a new sugarcane harvest. The decline in revenue primarily stems from a reduced volume of soybean sold. We have already mentioned that last year we opted to sell a significant amount of soybean due to logistical uncertainties, which turned out to be a wise decision, along with the prevailing market prices at that time. This year, however, our sales pace has been slower. Regarding sugarcane, we noted last year that we started with an average price of R$145, which has since dropped to R$1.14. Additionally, a fire on our farm led to a loss of 200,000 tons of sugarcane, affecting operations significantly. When we accounted for the sales of farms last year, there were substantial sales at Taquari Farm, and we have announced a minor sale at Rio do Meio; these factors contributed to the drop in revenue. The adjusted EBITDA stands at R$168 million, with the EBITDA margin decreasing to 23% from 45% last year. This margin reduction in grains has been anticipated and is detailed further in the next section. Although favorable prices for grains existed, rising costs, particularly for fertilizers, contributed to this margin decline. The sugarcane segment also suffered, experiencing a R$150 million impact, which we outlined as R$50 million due to lower volume from the operational issues, another R$50 million from price dips, and R$50 million related to increased costs. The net profit reported is R$25.8 million. Looking ahead, we announced in April the sale of the remaining part of Araucária Farm, which involves two contracts scheduled for completion in the next quarter. We are also preparing for the new harvests of sugarcane and corn, in addition to some winter crops. Moving on to soybeans, we sold 98,000 tons this year compared to 145,000 tons last year, with 65,000 tons coming from ongoing harvest efforts. Despite higher unit prices, costs per ton have risen, thus impacting our soybean margins from 47% to 28%, though prices remain attractive. For corn, we sold 122,000 tons, with the entire harvest accounted for last year, and 90,000 tons from the winter crop, incurring significant fertilizer costs. The total cost and margin are approximately 50%, which is above historical averages. Regarding sugarcane, we have not yet reported results from the new harvest. It's important to highlight the reduction in the number of tons, dropping from 1.387 million to 1.161 million. In 2022, prices surged significantly, and there has been a subsequent decline this year, influenced by taxes and oil price drops as well. The current costs of sugarcane have decreased, with operational issues also playing a role. On the next slide, we will discuss operational EBITDA, noting that this is net profit before farm sales, showcasing our strengths through a combined approach of operational performance and farm sales. We excluded farm sale revenues here and included depreciation along with derivatives results. We had R$40 million in hedging losses from input purchases due to market price fluctuations. Currently, we are witnessing prices around R$125 to R$130 per bag of soybean. In the coming nine months, we will begin harvesting sugarcane again, expecting 600,000 to 700,000 tons, along with 140,000 tons of soybean and part of the corn harvest. Opportunities for physical sales appear limited now, but we anticipate some impact from corn sales in the following quarter. On the next page, we review the company’s debt position: R$226 million in short-term debt, R$357 million in long-term debt, totaling R$583 million, with a majority of debt at 96% CDI in Brazil. Short-term debt will require R$226 million in payments, but we are actively seeking new loans, keeping the company's leverage very manageable. We also have R$450 million in farm receivables, with additional sales anticipated to be recorded in 2024, particularly from Araucária Farm, where receivables are notably higher. Our net debt stands at R$400 million, with R$240 million in cash. Our low cash position results from receivables related to the upcoming sugarcane and soybean harvests, as many costs have already been settled. Overall, our financial indicators appear strong. The next slide illustrates the performance of AGRO3 shares in relation to the stock market index, demonstrating substantial daily trading volumes. We note that the current share price is low, presenting a favorable investment opportunity. We conducted an independent valuation with Deloitte, who confirmed our property holdings, suggesting that the company's share value is significantly above R$39, indicating strong potential future growth and compelling reasons to invest. Now, we would like to open the floor for questions and answers.

Pedro Fonseca, Analyst

Good morning, André, Gustavo. Thank you. I have two points to discuss. First, regarding the sale, André mentioned significant improvements with the exchange. Can you elaborate on the company's strategy for selling? What are your expectations for inputs in 2023 and 2024? The table you provided was quite interesting, especially concerning margin per crop. What are your projections for margins by crop? Second, I would like an update on the recovery in the area affected by the sugarcane fire. What productivity can be anticipated for this region, and how much do you think you will benefit from the increase in sugar prices? Lastly, I have a quick question about the seed production operations. Is the seed production plant owned by you, or is it outsourced? Is it intended solely for your use, or do you plan to sell seeds in the future? Should there be more investment in seed production?

André Guillaumon, CEO

Pedro, we could spend the entire afternoon discussing these three questions. I will try to be concise and provide clarity. For 2023 and 2024, we are keeping a close watch and have started purchasing. We are observing a curve, with the Chicago screen at 1,350 to 1,380. Currently, we face a significant increase in production alongside a drop in the basis. Therefore, we need to account for this along with the total price. It’s not just about Chicago; it involves the Chicago basis and other factors. Looking ahead to next year’s basis curve, when we crafted this budget a year ago, we anticipated a basis of 45 positive points. With Chicago staying similar at 1,370, we ended up around that mark. However, the basis shifted from a positive 45 to a negative 100 today. If we examine the future screen, we are looking at a basis of minus 5 to minus 10, indicating a substantial drop in prices for future basis. What should we expect? We intend to be proactive when we see margins recovering, aiming for a 30% to 35% EBITDA margin. At that point, we will engage in buying and selling. Currently, there is a wait-and-see approach due to pressure on fertilizers and hopes for margin improvements. We will choose to be more aggressive when we reach that 30% to 35% EBITDA margin, which we believe is achievable. We have implemented cost reductions and expect to attain that margin. This is what we are keeping an eye on. Regarding sugarcane, the fire has indeed impacted us. It's important to note that we don't completely lose the sugarcane. We have irrigated sugarcane, which means after a fire, we need to use water in the burned areas and reposition equipment to try and recover the damaged sugarcane. In instances of burnt sugarcane, we must harvest early, and we had nearly 4,000 hectares of irrigated cane that would have been harvested later in the season. This resulted in the loss of potential additional growth from those 4,000 hectares where we used extra water to ensure productivity. Additionally, for the rest of the irrigated sugarcane, we had to divert water to protect the burnt cane. This does not mean we lost 200,000 tons, but rather that we had to harvest early and the water that would have enhanced production was spent on salvaging the burnt sugarcane. We do anticipate a recovery in sugarcane, particularly in the Midwest, and in the Mineiros area, we are increasing sugarcane planting to boost volume through more investments. We have the capability to irrigate 20% more than last year, which can significantly enhance productivity in regions where water aids growth. We are making progress on this front. As for sugar prices, unfortunately, all of our sugarcane is directed towards ethanol. A rise in sugar prices can improve ethanol prices as well. To address your question on seed production, five years ago, the cost of seeds per hectare was around R$170 to R$190, while today it has surged to R$750 to R$800 for soybeans. Thus, costs have increased by R$600 primarily due to biotechnology and other factors. We have initiated small-scale seed production, allowing producers to cultivate their own seeds upon registering their fields. We have been developing technology and building our expertise, and now we have a coordinator dedicated to seed production. We've focused our investments on enhancing seed quality at our facility in Chaparral, leveraging the area's altitude and irrigation to produce more seeds. Our aim is not to sell but to ensure a reliable supply of high-quality seeds, reducing costs for our company. Over the next two to three years, we are on a learning curve to refine this process, utilizing modern machinery to scale up our seed production. Currently, we produce 15% to 20% of our seeds, and we aim to increase that to 40%, 50%, or even 60%. While we may not reach 100%, achieving 60% to 70% would significantly benefit the company. Additionally, concerning sales, we have sold 65% of our soybean crop by July 30 and aim for 80% to 85%. Historically, we have seen positive premiums, but these are now turning negative, with escalating costs and freight pressures. With high-interest rates and a solid corn winter crop, we don't foresee a recovery in soybean prices. Our goal is to sell 100% of our soybeans by August, while for corn, we have a substantial volume hedged but lack demand, so we are seeking selling opportunities but are not finding any.

Henrique Brustolin, Analyst

Good afternoon, André, Gustavo, Ana. Thank you. I would like to follow up to understand your vision regarding the significant reduction in the basis. How do you see this evolving in the future, considering the challenges in making forecasts? What is your perspective for the next harvest? I would like to hear more about that. Additionally, regarding costs for the 2023 and 2024 harvests, could you help us understand the impact of the exchange rate and the drop in fertilizer prices? Has this been beneficial for production costs this year? Given the lower prices of materials used, how should we approach the cost expectations for 2024? Lastly, you announced the significant sale of Araucária Farm. How do you view the current land market, considering that land prices are rising? Should you be looking to buy or sell?

Operator, Operator

André, before answering just let me join Helmot’s question, which is in line with Henrique. He sees that the company didn’t buy much land in the last few years in comparison with the sales, the land inventory dropped. What is the company’s strategy from now on? To lease land, because lease land because the price is very high or buy land in Bolivia and Paraguay or wait for opportunities with low price?

André Guillaumon, CEO

Well, this question is very important. Let me explain. The decrease in fertilizer use that you mentioned is true for Brazil and many companies, but it doesn't apply to us. We are different because we transform land and have many new areas. In these new areas, we can't lower the amount of fertilizer while developing the land, so our fertilizer usage should remain fairly consistent compared to last year. As we continue to develop land, we shouldn't see significant changes. While there is a reduction in fertilizer costs, we won't adjust the dosage from last year due to the new areas we have. For example, we can't simply reduce fertilizer on areas with soybeans. We still have new areas, such as Panamby, that we are developing. In BrasilAgro, the changes in fertilizer dosage are minimal. Regarding future production, we face significant challenges due to limits on exports. We are observing increased planting in the U.S. If soybean production decreases in the U.S., we might see a recovery in prices here. Additionally, Brazil has gained market share due to the situation in Argentina, where the production has decreased. As a result, everyone is buying soybeans from Brazil. If there is a new balance in global production, it will ease export pressures and help stabilize the market. Currently, Argentina's production has fallen by 25 million tons while Brazil has increased by the same amount, leading to heightened demand for Brazilian soybeans. In the medium to long term, if this balance is achieved, distribution will also stabilize, despite Argentina producing more meal than grains. As for land, I can address both questions. Yes, we will continue selling more land. I often mention that the liquidity in the land market is strong, regardless of increasing or decreasing prices. We have received more offers for farms and will remain sellers, preparing for future opportunities to buy when they arise. Although we are currently selling more than buying, we are also leasing land, which has increased our productive area. Historically, our operational EBITDA has grown significantly, likely due to leasing more than purchasing land. We aim to maintain a balance where 40% to 50% of our land is owned and the remainder is leased. We plan to expand in sugarcane as we have already grown a lot in grains, so we will pursue leased land for this purpose. We will continue looking for opportunities to transform pasture into grains, while also being ready to respond to market challenges, ensuring we have liquidity to support producers. Overall, we are currently more focused on selling than buying.

Henrique Brustolin, Analyst

Very clear. Thank you.

Operator, Operator

We have another question from Angelo. Please say your name. We can answer an extra question. Angelo, we can’t hear you? Well, we have no more questions. We had a record public, record number of participants and plus people watching us on YouTube. Thank you. We are very optimistic with the end of the year, in spite of this more difficult scenario in price and operations. I’d like to thank André, Gustavo for participating and I’d like to pass the floor to André and Gustavo for their final comments.

André Guillaumon, CEO

Thank you, Ana. Once again, Ana, we will work. We will do our best to have more sales of farmland, although, we had a lot of sales. If you look at the net result of the sale, we will have very good EBITDA and net profit in the year when we consider the result of the sale. And there’s more to sell, there’s more to sell, more areas to work, leased areas, we are looking at some purchases and more sales. As I said, we will have. I say once again, we will work to make more sales this year in order to monetize this good moment with a lot of liquidity, capitalize the company and when the time comes we will buy. We always said this. The company is prepared to serve these good moments and capture the results. Thank you very much and I thank all those who prepared this material and participated with us. We wish you a good afternoon.