Earnings Call Transcript - LND Q1 2020

Operator, Operator

Good afternoon. Welcome, everyone, to BrasilAgro's First Quarter 2020 Results Conference Call. Today, we have Mr. André Guillaumon, CEO, and Mr. Gustavo Lopez, Administrative Officer and Investor Relations Officer, with us. You can access today's live webcast and presentation through BrasilAgro's website at www.brasil-agro.com. This event is recorded. Before we proceed, I want to mention that forward-looking statements are based on the beliefs and assumptions of BrasilAgro management and the information currently available to the company. They involve risks and uncertainties as they relate to future events and depend on circumstances that may or may not happen. Investors should understand that conditions related to macroeconomic scenarios, the industry, and other factors could lead to results that differ significantly from those expressed in such forward-looking statements. Now I will hand it over to Mr. André Guillaumon, Chief Executive Officer, to make the presentation. Sir, you may begin.

André Guillaumon, CEO

Good afternoon, everyone. Once again, it's a pleasure to have you all here at this moment to share our results of the first quarter. This year is starting now. We are in a difficult time in terms of market and weather, so it's good to share our expectations with you and talk about our results in this first quarter. We are always available to answer your questions. So I would like to start by saying that on Page 2, we have a summary of our performance in this first quarter. It has been a robust quarter, and we'll compare it to the first quarter of last year. Let's start by highlighting that we had a net revenue of BRL185 million in the first quarter, and the net income of BRL40.6 million. The adjusted EBITDA is BRL57.4 million. The revenue from sales of farms amounted to BRL28.7 million. And once again, it has shown a good result at the end of the year, which has resulted in robust dividends for the market. We have approved in the company's shareholders' meeting payment of dividends in BRL50 million of approximately BRL0.93 per share. So once again, this is a quarter where we start combining operational and real estate results. The sales from property results are more seasonal, whereas the operational result is distributed throughout the year. We have, as an assumption, the combined result of both. This is the strategy that we believe strengthens our business model. Now on Page 3, I would like to explain the two transactions that happened in this quarter, with total sales in the quarter of 1,219 hectares of land, amounting to BRL28.7 million. We separated two operations, one with the IRR of 21.4% and the other 14.7%. Taquari Farm was bought in 2007. We made a small sale, and now this is the second sale in October. This is land with a small area – a farm with a small area of land, 1,100 bags of hectare. The nominal sale value was an accounting gain of BRL4.3 million, with an approximate IRR of 21.4%. This farm had an issue to be overcome regarding registration and payments, which was overcome long after we purchased the farms. The IRR was impacted by this payment, which took a bit longer. This first sale was the initial one. The second sale happened in September, which was the first of another part of Jatobá Farm. We have always shown that the assets in Bahia are worth having. Bahia has good conditions and good productivity, not excellent, which has brought a lot of liquidity to the area. We managed to make another significant sale in this quarter of the year for a total of BRL22.7 million and 1,134 hectares, with 893 hectares of arable land. This had an accounting gain of BRL16.6 million and an IRR of 14.7%, which was a pleasant surprise for this asset. Now moving on to Page 4, this is important to comment on what has happened in the harvest year, 2019-2020. Brazil had a position when compared to other years of delayed planting, more in some regions than others. In Mato Grosso, we are quite advanced compared to the rest of the state. In other regions, we are a bit delayed regarding stabilization due to the variability of rainfall volume. As you may know, the weather has been quite erratic this year, especially at the beginning of the summer season, with rainfall that resulted after a cold front coming covering a certain region. This situation allows for one farm to plant while another farm is not able to. We are expecting the final rainfall for the year, but so far, it has been a challenging year because we don't know exactly when the rainfall season will start. In Mato Grosso, we have advanced with the planting season in our Xingu operation, where we have more than 19,000 hectares planted out of a total of 20,000. So, one or two more days of planting will be completed. Taquari has also progressed in the planting of soybeans. We have started planting in the Northeast region at Chaparral Farm, where we've planted one surface. We had one week of drought, and then this week, we had the pleasant surprise of rain returning. So we'll resume planting soon. This is a summary chart of all the planting areas. Soybean has shown a year-on-year growth from 51.8 to 54. Corn first crop has remained stable, while the corn second crop shows significant gains. This is worth highlighting here because, as you may recall, we previously mentioned that the Xingu operation was an area that started its operation with caution, leading us to plant soy with longer intervals, resulting in a better position for second crop planting. Today, the operation is doing well, operating smoothly. We are at 100% operation within schedule, which is to finish the second crop by the end of October. We have even exceeded our expectations, planting more area. Thus, we will see significant growth in second crop corn of 11.3%, most of which comes from the Xingu operation. In sugarcane, the areas have remained stable with minor changes due to expectations in production and plans to renew the sugarcane plantation. This year, we had some areas with pleasantly surprising production. For last year, we have maintained the same figures, except for Jatobá, where we increased the crops. In cotton, we have planted area in a farm where we believe there are important margins to capture. We have a year-on-year growth of 5.4%, but it's essential to highlight that this growth in planted surface needs to account for the farms that were sold. Despite selling a lot of land that generated good economic results, we have significant potential for cost transformation while growing the planted area, even in a divestiture year. Moving on to Page 5, as I mentioned, the grains and cotton have shown an important growth compared to the last crop due to the adjustment of packages. The chart reflects my previous comments for the first and second corn crops. For cotton, we expect production to be slightly better than last year. Overall, for those of you tracking our figures, we recorded an increase in tons of 298,000 tons, which accounts for a 28% increase in production volume when compared to last year. Page 6 now provides an overview of our cattle raising. It's essential to remind you that cattle raising is a driving force for transformation within the company. It is something we decided to do three years ago, and we had a very pleasant surprise last year, even more so now that the commodities market for beef has experienced significant price increases, and we will capture that result, as we've seen in price changes over the last few months. In the initial months of this year, we still don't have a large number of heads cured because most of the heads are cured in the final months of rainfall, which will affect the prices. The pasture areas remain stable, and the number of heads remained stable. There has been an increase of 800 heads, and with an ADG of almost 500 grams a day, we find this production level to be favorable. Large cattle raises typically produce something over 500 monthly, almost 600. So for us, this is a transformation tool. We calculate pasture area according to planting area, marking it as a temporary activity for us. Overall, we have had excellent results, and the details will be shown later. On Page 7, you can see the year-on-year figures for sugarcane harvested areas. The number isn't completely final, as some volume is still pending realization, but we will be close to last season's production figures, while experiencing an increase in productivity. Maranhão, which was a challenge, now shows that we took over the unit with 57 tons of sugarcane per hectare, and at the end, we now have year-to-date 80 tons per hectare. In just 2.5 years, we increased from 57 tons per hectare to between 75 and 80 tons, a significant growth, and this year, we will exceed 1,200,000 tons. Next year, we're projected to grow even more, which has resulted from technologies adopted and introduced year on year, freeing up more areas for grain production. In sugar, we have had two significant moments to separate into two areas. In the Midwest, we have favorable sugar ratios, achieving an average APL of 146. We are completing the Maranhão area, which still lags. There is potential to enhance the sugar concentration there, currently at 132-133. The average figure we present is 142, considering both Midwest and Maranhão. It is important to note that while we assess performance, we focus not only on tons of sugarcane per hectare but TTH, meaning tons of sugar per hectare, TPH. Our units in the Midwest have surpassed 14,000 kilos of TPH per hectare, and we aim to achieve similar results in Maranhão. This has become a key factor for us. Moving on to the next page, we started the year with a lot of price volatility. The trade war between the United States and China remains under development. It was expected to conclude at the event in Chile, but it was postponed, generating uncertainty. As I always emphasize, we aim to increase the margins of the company. Whenever there is an opportunity to sell and combine results, we take action. Today, we have 44% of the next soybean crop at a price of 9.33, having taken this position back in May when soybean was at 8.90. We have actively sought to capture some mismatches and improve results, but we remain cautious regarding price expectations this year. Observers of the soy market notice an upward trend in Chicago, partly due to China and decreased U.S. production from approximately 120 million tons to roughly 95 million tons, attributed to delays in planting. While the planting was adequate, the maturing window for soybeans in the North and Midwest of the U.S. altered significantly. The official USDA figures underscore the impact, highlighting figures as low as 90-95 million tons, indicating potential for market growth. When examining freight tables, we note unprecedented misalignments, reflected in base projections previously available to companies for the harvest season. Thus, while we expect spot bases to fluctuate, projections for lower future bases remain our focus as we navigate these uncertainties. In conclusion, I’ll now hand over to Gustavo, and we are available for the Q&A session. Thank you.

Gustavo Lopez, Investor Relations Officer

Thank you very much. Thank you to everyone attending this call. As of July this year, we will show our financial performance. On Page 9, we have EBITDA, then the net income, minus interest, taxes, and depreciation. We always focus on the characteristics of our business. Here, we exclude results of asset sales. In the first quarter of this year, we achieved an adjusted EBITDA of BRL57.9 million, which is a combination of operations and real estate. Last year, we had a significant sale of most of Jatobá, resulting in high revenue from those hectares. This year, there are two sales mentioned by André at the beginning of the presentation. We have recorded one of these sales, the other part from Jatobá which has already arisen – we will account for it in the next quarter. On the next page, removing results from real estate sales, here we see BRL40 million of adjusted income compared to BRL5 million from last year. Sugarcane prices have increased to BRL0.09 better than last year. We have agreements in sugarcane sales with inventories of soybeans and corn, especially stemming from the farm sales. Since incorporating new lease areas, our real estate results are higher than last year. Now, on Page 11, you can see our revenues from farm sales amounting to BRL123 million, a growing value. This year’s revenue stands at BRL18.8 million, while for the previous year, it was BRL76 million. The revenue from sugarcane impacted results due to increased production in this quarter, harvesting BRL90 million last year, whereas it was BRL76 million. This year, for the previous year's production, soybeans reached 45,000 tons, while corn produced 3,800 tons last year compared to 4,000 tons this year. The productivity gains are not solely attributed to price changes. The average soybean price last year stood at BRL71 per bag in contrast to this year's BRL69 per bag. Consequently, we had to cover substantial costs to remove soybeans from Brazil last year. This year, we have achieved the best price we budgeted for, bringing our net revenue to BRL184 million, gross income of BRL61 million, with sales expenses increasing alongside volume. We arrive at our financial results, with financial expenses near BRL4 million, in addition to the cost of debt. We noted some amounts are not invested along with other effects that must be considered concerning soybean bags. Reflecting upon net income, we record BRL40.5 million. Comparing this period to last year, EBITDA from the farms amounted to BRL60 million, while the rest came from operations. Notably, the financial result remained positive as we faced multiple amounts receivable concerning soybeans, a factor driven by dollar variances and soybean prices. The following page illustrates our balance sheet on Page 12. Here, a new rule effective January 1 of this year mandates that all contracts with fixed price amounts must be accounted for both liabilities and assets. Some agreements last longer than 15 years with variable prices that aren't booked. Our leasing agreements summarize as BRL79 million booked, equaling the liabilities reflected as financial leasing. Additionally, other operating agreements undergo recording under the same criteria. Examining assets as of September 30, we hold cash and cash equivalents, which encompass current assets and securities. It's important to note we possess BRL156 million in trade receivables, both short-term and long-term, with BRL200 million designated for fund sales. Also, BRL500 million results from recognizing fair-value assets in Paraguay, where market values continue to increase. This consolidated figure, encompassing Brazil and Paraguay, is close to BRL1.5 billion. For liabilities, we have BRL98 million owed to suppliers, reflecting loans and financing ongoing needs. As we review, the current and noncurrent liabilities appear balanced against noncurrent assets, emphasizing that we possess treasury stock in a repurchase agreement worth BRL35 million at the purchase price of approximately BRL11 per share. We maintain a surplus reserve of BRL40 million. On Page 13, we view the company's debt. The total debt as of September 30 stands at BRL257 million, while net debt accounts for BRL128 million. Comparing to June 30, 2019, the balance was BRL131 million. In this quarter, we made payments on debt and interest totalling BRL46 million, including financing costs for sugarcane. All debt is denominated in reais. Importantly, our adjusted net debt calculations reflect asset divestitures. On the right chart, we see assets continuing to mature alongside debt considerations and financing costs. It's vital to highlight, the average cost of debt is presently at 6.2%. Page 14 indicates BRL50 million in dividends to be paid out. This illustrates our commitment to shareholders for continual dividend payment. We view BRL50 million, yielding 5.6%, as an attractive return rate, equating to almost BRL2 per share, or approximately $0.93 per share. Page 15 emphasizes this is an excellent investment opportunity. Our net asset value reflects shares are trading near their book value, and property market values hint at an upward potential of 90%, signifying solid investment security. Lastly, Page 16 displays a chart demonstrating the performance of our shares AGRO3 and LND against the Ibovespa Index, showcasing noteworthy appreciation recently. There’s a discount of BRL1 per share, attributed to dividend payments. Overall, shares have been well-received in the market alongside the company's positive valuation trends. Thank you very much, now let's transition to the Q&A session.

Luciana Carvalho, Analyst

My question is that Bahia has improved in terms of liquidity; could you give us an overview of the main areas, the main regions where you operate? How do you see this increase in productivity and liquidity? And what do you expect for the year in terms of real estate performance?

André Guillaumon, CEO

Luciana, that's an excellent question. I would like to give you our view in terms of real estate and property deals. As a company, we have a very aggressive goal regarding portfolio sales. When everyone wants to buy, we want to sell. So we need to operate against market trends; this is a significant challenge requiring anti-cyclical action. Specifically regarding your question on regions of operation, I previously mentioned Bahia due to the challenges faced last year during the second crop; however, looking back from 2013 to the 2017 crop, Bahia encountered difficult periods around productivity. Knowing that purchasers of farms in Brazil tend to be the farmers themselves, when profitability declines, the most viable option often becomes purchasing more farm land. Thus, Bahia experienced a period of suppressed liquidity for 3 to 4 years, marked by uncertainty surrounding productivity. Now, demand has recovered to levels we consider normal, coupled with expectations for a ramp-up. If we encounter 2 to 3 more productive years in Brazil, market demand will subsequently increase. Other regions like Mato Grosso, where we operate, have remained stable in terms of production. We adjust sales depending on specific area developments. Meanwhile, locations such as Maranhão, where we operate as well, cater to larger clients that contribute to liquidity through large properties, with foreign capital playing a significant role. Ultimately, liquidity in farm sales aligns closely with agribusiness profitability. When grains maintain good and stable margins, alongside sugarcane performing adequately, we can anticipate increased soybean production. In summary, our projections for 2019 suggest higher liquidity for farmers than experienced in 2018. Regions showing impacted productivity are improving alongside other drivers. In Mato Grosso, for example, there has been significant cotton-driven momentum; however, despite the planted area, cotton represents a small portion of the broader agricultural profile. I would assert that cotton has seen a reduction in contribution margins year over year, with certain areas highly reliant on cotton. Apart from Bahia, which maintains its cotton reliance and has consequently undergone suppressed liquidity, the areas with influential grains like corn and sugarcane anticipate heightened liquidity for the year.

Unidentified Analyst, Analyst

I have a question about the payment of dividends on the 14th; it's based on the share positions on what day?

André Guillaumon, CEO

Well, this is the question everyone is asking, right? The good news is that we're paying dividends before the holiday. The holiday is on November 15, and we're paying it on the 14th, so you all will have your pockets filled with money. But since we had the shareholders' meeting on October 16, the shareholding position for all shareholders on the date of the shareholders' meeting, which is October 16, will receive BRL0.93 to be distributed among share holders.

Unidentified Analyst, Analyst

I know you've discussed business sales previously. Would you provide another driver in terms of reais for this year and next year? How will you distribute the funds collected, in terms of interim dividends or share repurchases?

André Guillaumon, CEO

Okay, that’s an excellent question. First, I must be cautious in providing too much guidance or else the investor relations team will be displeased. Every month, we pursue aggressive goals around real estate sales. Reflecting on historical sales trends over the medium term, we cannot isolate real estate sales within a single year. If you analyze a three-year scope, we typically aim to sell between 8% to 10% of our asset value annually. Certain years will yield more pronounced sales figures than others, and this fluctuation varies year-by-year. We emphasize that the company is a solid investment option. When considering medium-term horizons, it is prudent to avoid evaluating solely on a singular moment in time. We project annual income balances with a goal of BRL70 million in results from sales of our farms. However, how much land can we sell? That depends on market pricing. Our business model has established targets for the year that estimate an income of BRL300 million from sales. Regarding operating income—especially for the first quarter—we performed well, buoyed by favorable sugarcane prices, and optimism remains for year-end and next year.

Unidentified Analyst, Analyst

How will you utilize those funds? Will you pursue share repurchases, issue special dividends, or acquire more land?

André Guillaumon, CEO

Absolutely, recurrent dividends are crucial for generating a sense of security among investors that consistent dividend payments are assured. The payment of dividends or distributions of income will typically be lower when we have substantial projects requiring investment. In contrast, when there are few feasible opportunities for investment, this can yield higher dividends. To summarize, we intend to distribute funds into three pillars: One pillar focuses on new investments and acquisitions, which we must continue to pursue. As I often say, supermarkets must be well-stocked with products on the shelves, and these products are our farms. Further, we will invest in transformation; hence, a portion of proceeds from sales accelerates the introduction of new operations that ensure profitable returns to our investors. Finally, the third driver involves dividends, meaning the combination of these three factors or drivers guides our allocations. I cannot specify the exact proportions for each, but the goal is to maintain 25%. If we want to compute, this guideline is a fair estimate of BRL70 million, allowing you to calculate what we’ve delivered up until now. However, our obligation is to deliver 25% of our net income in dividends. While we are mandated by law to pay this 25% minimum, we aspire to exceed that mandated level consistently. Overall, it is crucial to balance these three drivers—dividends, ensuring the profitability of new assets, and transformation initiatives.

Victor Saragiotto, Analyst

I have three questions. The first pertains to soybean productivity. It seems productivity has dipped slightly from 50 to 49 bags per hectare. Additionally, the land sale effect, potentially with new leased lands maturing and the mature lands sold, seems to have influenced overall productivity. Any guidance you can provide about mature land would be appreciated. Secondly, you've noted a 6% to 7% cost increase in the second crop; what drove this increase? Was this due to exchange rate fluctuations or rising dollar prices? Lastly, regarding the acquisition of AGRO5, we've reviewed their website. Their focus appears to be on machinery and tools. Could you clarify the rationale behind this acquisition? Are there plans to enter the agricultural product sales market? What are the next steps?

André Guillaumon, CEO

Victor, as always, you bring an array of insightful questions. The good news is we just finished planting, and you’re invited to visit us. To address your initial inquiry regarding productivity, it’s noteworthy that the reduction from 50 to 49 bags per hectare warrants attention. This figure encapsulates average productivity across our operations. Our analysis encompasses first, second, and third-year areas concerning production. Year-on-year, we have divested some areas. So out of the 14,000 hectares sold, mature lands with the highest productivity comprised our divestment. I would like to clarify that productive mature areas average between 57 and 60 bags, with some areas even exceeding that. This reduction also stems from first-year areas in Bahia experiencing stress in January that led to diminished yields, landing between 28 and 30 bags per hectare. The average of 50 correlates to a blend of high-producing mature land mixed with less productive novice land. Regarding costs, particularly in corn, the increase is driven by two main factors: the exchange rate and heightened fertilizer costs. Last year’s first crop relied on highly defensive planting practices within the Xingu operation. We've seen substantial enhancements during this year’s second crop as we increased our investment in nitrogen-rich fertilizers. The technological adjustments made, in tandem with rising dollar costs, contributed significantly to our cost inflation within corn. Expect to observe these effects as we embrace new practices this year, marking both exchange rate impact and technological innovations. As for AGRO5, we perceive a future consolidation of operations. This company has experienced significant growth. AGRO5 already holds a stake in our operations, reflecting synergies in benchmarking terms. The AGRO5 platform primarily revolves around machinery and tools, yet we foresee potential for broader applications. In our investment, we anticipate entering the marketplace and leveraging commercial insights concerning commodity input prices. This investment allows us to engage with a technology-keen younger demographic, affirming our commitment to innovation and efficiency across our agricultural endeavors.

Victor Saragiotto, Analyst

We observed developments in the cotton area, where your guidance suggests you aim to cultivate slightly over 2,000 hectares. The recent drop in cotton prices may obstruct margins. Given the current cotton pricing environment, should we expect the company to scale by an additional 500 hectares annually, or do you envision a more ambitious growth trajectory for cotton specifically?

André Guillaumon, CEO

Excellent query! Let me provide an overview regarding the market dynamics. The observed decline in cotton prices reflects an upturn in production—specifically, the price wars in China have resulted in imported cotton volumes exceeding 420 tons. We recognize that numerous cotton producers in Mato Grosso have transitioned from 2,300,000 tons to an anticipated 2,830,000 tons this crop year—a striking growth over just two years, staggering around 40% to 50%. However, the domestic market has held steady, remaining unchanged over the past five years; maintaining levels of 2.8 million tons, approximately 700,000 staying domestic, while 2.1 million ventures into international markets. The previous season only witnessed 1.6 million exported, down from 2.3 million. Thus, we perceive marked declines in margins moving forward. It's vital to state we're not predominant cotton players, yet we find substantial value in other associated outputs. While cotton assures profitability, it is paramount in liquidity. For soybeans, some of the areas produce consistently lower costs in the corresponding cotton territory. As such, we forecast expansion in cotton production over time. Importantly, mature lands established with cotton exhibit immediate returns, assisting us with liquidity during workforce transitions from suppressed economic demands in Bahia. Importantly, matured farmlands lend stability to our yields while we incrementally invest in cotton's growth across leased territories. As we nurture these investments, continuity in a controlled growth of cultivated hectares becomes our focus, amid considerations surrounding economic metrics and cotton's current valuation landscape.

Operator, Operator

Since there are no further questions, I turn the floor over to Mr. André Guillaumon for his final remarks.

André Guillaumon, CEO

Thank you all very much. It was great to have you here. I'm very happy when we have a call with such a high level of participation and questions. All the managers and officers of the company are strongly committed to this higher purpose, which is to produce food responsibly. We have been actively pursuing that. We are dedicated to that goal, with a responsibility to ensure we produce food sustainably moving forward. Thank you all, and have a good day.

Operator, Operator

The conference call of BrasilAgro has now ended. We thank you all for attending and wish you a good afternoon.