Earnings Call Transcript - LND Q2 2021

Ana Paula Ribeiro, Manager for Investor Relations

Good afternoon. Welcome everyone to BrasilAgro's Second Quarter 2021 Results Conference Call. I'm Ana Paula Ribeiro, Manager for Investor Relations and I have André Guillaumon, CEO and Gustavo Lopez, Administrative Officer and Investor Relations Officer. This live webcast is being recorded and you'll be in listen-mode only. Next, we will have the Q&A session exclusively for investors and analysts, when further instructions will be given. The audio is being presented simultaneously on the Internet, www.brasil-agro.com where you'll find the slides of the presentation that we will have today. Before proceeding, I'd like to clarify concerning the declarations that may be made laid here during the conference concerning the business perspectives of BrasilAgro projections and operational goals. They're based on assumptions and beliefs of the board of the company. They involve risks and uncertainties, they refer to future events and therefore depend on circumstances that may or may not occur.

André Guillaumon, CEO

Thank you, Ana Paula. I would like to thank all the participants; it's a great pleasure to be here to talk about our worst quarter, Q2 2021. We bring here many new things, many events that happened with us and in the market in the last few days. So let's begin the presentation. And we'd like to talk about the company and Q2. We will be presenting Q2 2021 and we have a lot of information to share with you to clarify many points, for those who follow us, those who are analysts. I say it is a company that has consistently delivered solid results. And it is a company that has real estate results together with operational results. And now we're at a very good time for commodities. We will have a lot of good operational results. Well, I'd like to call your attention to the highlights of the quarter. We closed with a net revenue of BRL348 million, net income of BRL52.2 million, adjusted EBITDA BRL116.7 million, and a new fact that we would like to inform most of you are already aware, the capitalization that the company did recently now, last Wednesday. And with this, we can see a very promising future concerning the liquidity of the company. We have no doubts that the consistent delivery will take the price of shares to where they should be, and we had a challenge in liquidity. Well, with this capitalization this increases our float and this for you, who are investors, you have been asking us for this, it makes sense now, we're a company with a consistent delivery of results that come together with real estate and operations and now with liquidity. This was missing in our basket of products. Production of sugarcane, we closed in December. We needed the harvest from Mato, with more than 2.2 million tons. We have been growing consistently in sugarcane with very solid results in sugarcane. Well, I'd like to talk about the follow-on; I always like to say to comment. We're now; we have structural issues and market issues, now we have a combination of both. We believe that it is a very positive time for commodities; we had around talking to investors. Mark, for example, market situation for example in Asia 40% of the animals were lost; they have the largest herd of pigs. So there was a lack of animal protein on a global level with the loss of these animals. And this brought euphoria to commodities in order to recover the inventory of animal protein around the world.

Gustavo Lopez, Administrative Officer and Investor Relations Officer

Thank you, Andre. Good afternoon. Let's continue with a focus on EBITDA and adjusted EBITDA. We have been monitoring the results closely. In Q2 2021, our EBITDA was BRL48.156 million, both including and excluding results from derivatives. This quarter reflects the positive impact of rising commodity prices. We started with an inventory of corn, and by December, we had sold this inventory, leading to favorable results consistent with our sugarcane performance. In November, we recorded 2 million tons, with prices increasing from BRL0.60 to BRL0.65, resulting in a significant positive impact. Last year, we reported BRL70 million, while previously we had BRL52,000; this year, we noted a BRL100 million difference, generating strong expectations for June 30. The market anticipates a good harvest, which is very encouraging for our results. On the next page, last year's operational results were BRL70.1 million. In the first half of 2021, we've seen a much higher EBITDA, largely due to corn and soybeans. Despite initial concerns about sugarcane demand during the pandemic, we are concluding this semester with strong productivity and stable prices, leading to optimistic margin expectations. As seen in our data, revenue from grains and sugarcane used to be evenly split, but now sugarcane accounts for over 76%. Moving to the income statement, the operational results for the quarter were very positive, although the final result was negative primarily due to financial outcomes. We sold part of our soybean and corn harvest at higher prices, which negatively impacted operations. However, we've sold a portion of the harvest, which helps balance the impact of rising prices. Our revenues are strong across sugarcane, cattle, and farm leasing. During the 2020 harvest, we sold at 92 and currently have a hedge position selling at 120, creating a specific impact on gross profit. We also acquired Agrifirma this year, and if there are no accounting contingencies, we expect positive results for June 30 contingent on our soybean and corn harvest. Currently, we have BRL380 million in farms with soybeans, and we anticipate continued calculations on this position. Regarding investments, we can see from the numbers as of June 30 that our liabilities include derivatives and receivables. This volatility mentioned in the year-end report does not reflect the next harvest. Our debt levels are low, and our challenge remains extending the duration of this debt, with part maturing in the next 12 and 18 months. We have obtained new debt to reduce receivables. Additionally, our total indebtedness is changing, with net debt slightly higher at BRL390 million. The company remains unleveraged. On the next page, the net asset value indicates potential upside, and our continued development will positively impact the portfolio. For those unfamiliar, the value of our shares suggests possible growth potential as the company gains visibility in the market, encouraging liquidity and attracting more investors. The next page illustrates the evolution of our share prices, AGRO3, in the stock market. We are committed to improving liquidity and paying dividends while attracting more investors. Thank you, and now we can begin the Q&A session.

Ana Paula Ribeiro, Manager for Investor Relations

Thank you, André, Gustavo. Now we'd like to go on to the Q&A session only for investors and analysts.

Pedro Soares, Analyst at BTG

Hi, Pedro. What is the conclusion of the follow-on and your comments in which you will now grow rapidly? Can you give us a forecast of the use of these proceeds for land? Apart from this with the current market situation, how much do you believe you will pay for each hectare?

André Guillaumon, CEO

Thank you for the question, Pedro. As I mentioned earlier, our primary challenge is to quickly allocate these funds. We are currently in negotiations, some of which are quite advanced. We are committed to being transparent throughout the due diligence process. We thoroughly review all documentation, which typically takes 60 to 90 days. If we finalize an agreement on the pricing day, the due diligence on the seller's solvency, land ownership, and environmental licenses will take around 90 days. Based on our experience with past acquisitions, this timeframe is standard. Regarding the formalization of contracts and the due diligence process, we anticipate that within six to eight months, we will be able to allocate these resources, factoring in acquisition times, documentation, and transfer processes. You also raised a valid point about identifying new areas for conversion. In terms of land pricing for conversions, particularly pasture land, we estimate acquisition costs around BRL15,000 to BRL18,000 per hectare, with a capital expenditure of approximately BRL3,000 to BRL4,000 depending on the pasture land's condition. We focus on net areas, as seen in Mato Grosso, where about 35% pertains to legal reserves. To summarize, the projected acquisition cost is around BRL15,000 per hectare with additional capital expenditures of BRL3,000 to BRL4,000. We aim to expand our production by an additional 25,000 hectares, which will positively impact our cash flow. Thank you, Pedro.

Unidentified Analyst, Analyst

One more question concerning the follow-on from Mr. Why the increase in capital? Do you have other investments after Bolivia? I believe you already answered most of it. But if you wish to supplement your comments, André.

André Guillaumon, CEO

Good afternoon. Thank you for your question. Yes, I will respond transparently. We have several initiatives in our pipeline, and negotiations are progressing well. We also have resources that are well positioned for quick allocation. Additionally, we expect resources from our ongoing harvesting operation in Bolivia, which has just commenced. By March and April, we will start harvesting sugarcane in Bolivia as well. Some resources have already been allocated there, and we anticipate results from the harvest in the next 60 to 90 days. In Bolivia, we have both the crop and the winter crop, along with the sugarcane harvest. Last year, we planted 1,900 hectares of sugarcane, yielding 80 tons, which contributes significantly to our revenue. To answer your question, yes, we are moving forward rapidly with negotiations for resource allocation and the acquisition of new plots of land.

Unidentified Analyst, Analyst

The next question from Eduardo regarding the results of the derivatives. What are the forecasts for the next several quarters?

André Guillaumon, CEO

Yes. We expect to produce 3 million bags of soybean. Currently, we have hedging at 120, and as of December 31, it was 150, which reflects the impact you've seen. We anticipate that by March 31, the majority of our harvest will be complete, and we will address the existing distortion. Initially, we estimated soybean prices at 90, but now we project them at 120 to 130 per bag, which we consider very favorable. The results from derivatives will likely remain negative, and our primary concern is the amount of soybean we have already sold. However, our policy is to sell only 50% of our crop before the harvest. With that in mind, we're prepared for these amounts. The company's risk lies in potential issues during the harvest. That said, we are optimistic about the results for March 30 and June 30.

Unidentified Analyst, Analyst

The next question comes from Anthony Gordon, Genagra. Hi, Tony. The reduction of the NAV per share due to the increase in capital.

André Guillaumon, CEO

Hi, Tony, thank you for your question. To clarify, the increase in capital involves around 20 million shares, bringing the total to 62 million, which represents a roughly 30% increase in the shareholder base. As a result, this leads to a reduction in the NAV per share. It's important to note that we received BRL440 million that will be added to the company's assets. In Bolivia, we achieved a 34% discount relative to the market price, which is beneficial. When calculating, the dilution is 30%, but there is an increase in NAV of BRL440 million. Alternatively, we can consider an increase of BRL260 million to BRL270 million in cash and BRL160 million in new areas at a 34% discount. When including the BRL160 million from Bolivia with the discount, this adds approximately BRL48 million. This effectively contributes around BRL200 million to the company's portfolio, combined with BRL270 million in cash. It's crucial to highlight that enhancing liquidity is key, addressing previous concerns about lower liquidity. This capital increase supports that aim and helps bridge the NAV gap. Gustavo pointed out that all our properties were evaluated at the price from June 30 of last year and will be reassessed on June 30, 2021. This reevaluation should substantially correct the company's NAV due to updated commodity prices. We expect not to rely solely on the spot price, but rather to reflect a curve showing commodity trends, which should be favorable. If you ask me, I believe that post-transaction and accounting for Bolivia's inclusion, even with 20 million additional shares, we should see an NAV around BRL35 to BRL40, considering the higher value of properties, cash, and Bolivia's contribution.

Unidentified Analyst, Analyst

The next question is, how is Brazil using the new technologies 5G Internet, biotechnology to increase productivity?

Gustavo Lopez, Administrative Officer and Investor Relations Officer

I'll do my best to answer your excellent question. We are utilizing a range of technologies, starting with our bio-fertilizers and bio-inputs. We established bio factories four years ago on an experimental basis, and we have since expanded to five bio factories that meet all our requirements this harvest season. We strongly believe in bio factories and bio-fertilizers as a means of achieving a better balance in agriculture. Traditionally, agriculture relied heavily on chemicals, then shifted to organic methods, and now we are moving towards a stabilized approach that combines both chemical and biological solutions. Our application of these practices varies across different scales and crops, especially in areas like pest and fungus resistance. While this shift hasn't yet reduced costs, it has improved efficiency, and we anticipate that this efficiency will lead to lower expenses on chemicals in the coming years. Regarding new technologies, all our operations incorporate Geo GPS for precise positioning, which helps create efficiency maps for planting and productivity. We've also adopted climate monitoring technologies in collaboration with various companies, providing real-time climate data across all our units. This capability allows us to generate rainfall maps daily, enhancing our decision-making processes. Innovation is at the core of our operations; we were the first agribusiness in Brazil to implement SAP for comprehensive data management across our farms, treating each area as a cost center. Our technology initiatives are numerous, with a strong emphasis on the upcoming wave of Agriculture 4.0, including sensor technologies and extensive drone usage. However, we face challenges related to connectivity, which is an issue affecting not just us but many large-scale projects. We are committed to improving connectivity and are optimistic about the potential impact of 5G technology, which we believe could enhance productivity and efficiency. We have systematically evaluated and prioritized 23 new technologies, focusing on those that yield significant short-term results. Among these, we've implemented five that are continually adapting to meet our needs. For instance, in cattle raising, we are employing infrared cameras for livestock counting and have integrated scales linked to SAP for real-time data capture. Every animal is chipped, allowing for extensive use of technology in our operations. The speed at which technology is advancing is remarkable, and we are selectively implementing solutions that create immediate value while also planning for medium- to long-term benefits. Everything we pursue is carefully mapped out with a clear execution timeline, and we maintain an ongoing pipeline of new technologies to incorporate. I'm confident that we are on the verge of a significant Green Revolution in the next decade, driven by Agriculture 4.0 and enhanced efficiency.

Unidentified Analyst, Analyst

The next question Gabriela. Congratulations for the results.

André Guillaumon, CEO

Thank you, Gabriela.

Unidentified Analyst, Analyst

Do you intend to maintain the sales of farms?

André Guillaumon, CEO

Thank you, Gabriela. Please say hello to Werner for me. Currently, our team is working on this issue in several regions, particularly Brazil. We are focused on the sale of farms, and it's important to note that farmers are starting to see a booming commodity market. However, there is often a delay between the rise in commodity prices and actual profitability. For instance, soybeans may be valued at 150, but the planting has occurred without sales yet. Furthermore, this year, many Brazilian producers pre-sold a significant amount of crops, indicating strong risk management which contributes to stability in the medium to long term. In a year where we witness a substantial increase in commodities, it can lead to favorable conditions for land purchases. We should approach this with an anti-cyclical strategy: when others are buying, we should consider selling. We aim to do both with the growing capital available. It is indeed feasible to sell, as we typically buy at lower prices and sell what is ready. Our strategy involves purchasing land for development and subsequently selling it. We avoid acquiring fully developed land due to high costs. Overall, we plan to be sellers in the coming months and effectively allocate this cash for follow-on opportunities as well. Thank you.

Unidentified Analyst, Analyst

Congratulations for the results. Do you have any expectation of changing the hedge policy?

André Guillaumon, CEO

It's important to highlight that we have a hedge policy in place to ensure margin and profitability. We set our budget around April and May, which is approved by the Admin Management Council by the end of May or the beginning of June, and that becomes effective on June 1. We have a defined price and we start our planning from there. We consistently monitor our margins; our policy allows for a hedge position of up to 80% before planting, and we can extend that to 100% once we begin harvesting since we have a better understanding of what we’ll harvest. Regarding exchange rates, we generally maintain a 5% mismatch with commodity prices in Chicago, but due to the significant volatility we experienced this year, we adapted to a 20% difference. This allows us to capitalize on the rise in soybean prices while managing currency fluctuations. Our approach remains consistent: we aim for profitability and steady results, and I don't see any need to alter our current policy. This year has presented a lot of uncertainty and volatility, as noted by Gustavo, particularly with derivatives tied to selling physical assets. However, we remain optimistic about premiums in the second half of the year. We have a strategy in place to neutralize derivatives with physical sales, and we expect a favorable outcome. To clarify, until planting we hedge at 50%, and after planting we increase that to 80%. We do not anticipate any changes in our hedging or derivatives policy. Although we are a smaller company, we operate sophisticatedly, hedging commodities such as soybeans and corn through Chicago and BMF markets due to export demands. We also closely monitor ethanol prices, which have risen from 1,300 to 2,200 recently. Additionally, we see significant price increases in cotton and cattle. For cattle, we hedge based on our operational production of animal protein while keeping an eye on the P&L, ensuring we manage our inventory effectively since it directly impacts our financial performance.

Unidentified Analyst, Analyst

The next question Finance, should the future acquisitions generate synergies with the current properties?

André Guillaumon, CEO

Yes, some of the units I mentioned will generate synergies. One of the acquisitions, along with some units in Mato Grosso and Taquari, will benefit from synergies in management since our general management is based in Palmas. There are significant opportunities for ESG initiatives and overhead reductions for BrasilAgro. Being listed on the New York stock market introduces certain costs like auditors and compliance, which provide security for investors but also add expenses. Currently, we are a relatively small company with around 155,000 hectares of production. The new acquisitions will allow us to increase capacity by 60,000 hectares without needing to hire more employees, though we'll have staff on the farm for operational needs. Regarding synergies, we aim to achieve this, particularly with our acquisition in Bolivia, where the challenge is to maximize those synergies. This could involve significantly lowering management costs in Bolivia. Synergies are essential for our company's growth, and we also have the potential to produce an additional 40,000 to 50,000 hectares without altering our management structure.

Unidentified Analyst, Analyst

The next question is. How do you believe for examples do you see many new funds in agriculture, can this impact your business new funds in agriculture?

André Guillaumon, CEO

That's a great question. I think anything that enhances market liquidity is a positive development. In the short term, if you're asking me about liquidity, we could sell property to a management group that currently has none, and we would continue operations. This is actually something we're pursuing, not just a dream. It presents a significant opportunity for us. There are certain assets where the price is very high, and the profitability of a fund wouldn't support leasing. I discussed this with one of those funds yesterday, and it makes sense. I don't perceive any pressure regarding acquisitions. I often say that while explaining what we do is straightforward, executing it is more complex. There's a notable difference between managing an urban real estate fund and a rural real estate fund, which requires different management approaches. If a fund lacks scale, it will face challenges, and I cannot imagine any investor investing in a fund that lacks governance or security. So, strong oversight and sufficient size will be crucial; without size or volume, even with tax exemptions, they risk losing control without proper governance. I believe this is feasible, and I view it positively as liquidity. We specialize in transforming land. I expect funds to purchase developed farms, not the kind of properties we typically acquire. They don't develop; they prefer to buy prepared land. If we have additional clients, that’s even better. Funds won’t engage in development plans because they don’t have the liquidity for it. So, to answer your question, I’m optimistic about the presence of rural and real estate funds acting as additional buyers. However, we’re talking about only a few funds in Brazil managing 66 million hectares. This can indeed create liquidity. Large funds would be interested in partnering with us on such projects; they buy assets from us because they know we can ensure profitability. This provides us with another avenue to allocate resources and efforts, ultimately increasing returns for our shareholders.

Unidentified Analyst, Analyst

Yes, Anderson he says thank you for the excellent live, congratulations. And let's work.

André Guillaumon, CEO

Yes, we're already working, you can be sure that we never stop here.

Unidentified Analyst, Analyst

The last question comes from the new railways can have an impact on your properties and reduce costs, the effect of railways, new railways?

André Guillaumon, CEO

That’s a great question. As I’ve mentioned before, short-term gains in logistics benefit operators first, and competitiveness follows later. Regarding technology, I believe it significantly enhances efficiency and can lead to cost reductions. For instance, we currently use sprayers that can identify the amount of green by detecting leaves and applying jets only where needed, resulting in increased efficiency. This method allows us to use a higher dosage directed at weeds while being less harmful to the environment. This is an example of technology contributing to our synergy and profitability. Overall, I think this is particularly beneficial in Brazil's agricultural sector, which has embraced technology more than other sectors. So, in response to your question, technology can yield scale benefits and cost savings in the medium to long term. We are also seeing positive results from technologies like biofertilizers and biocontrols. In our Xingu operations, we've faced issues with insects damaging soybeans, leading to discounts at sale. With the integration of biotechnology, we reduced the application of chemicals from five to three, using them five times less effectively. We are continually testing solutions for fungi and other areas. Additionally, Agriculture 4.0 is vital since information is essential and time is money. This innovative approach will provide us with greater efficiency, along with the perpetual use of advanced technology, which is expected to become more affordable and improve our profitability and scaling abilities.

Ana Paula Ribeiro, Manager for Investor Relations

Well, with this, we'd like to conclude the Q&A session in our conference call. I'd like to pass the floor to André to conclude our call.

André Guillaumon, CEO

Thank you, Ana. Thank you, Gustavo, for joining us on this conference call, and thank you to all participants. Our achievements are a result of the trust you place in us through our consistent performance, and I appreciate the hard work of our team. We have over 2,000 people contributing to our operations, and they are truly dedicated. This morning, Gustavo and I focused on human resources, people management, and performance evaluations, and it was very productive. Not only is our strategy clear and our processes strong, but we also prioritize our people and their development. Tomorrow, we will welcome new team members, and we need to guide them accordingly. A few years ago, our company was recognized as a great workplace, and I believe this is key to our sustainability and your trust as investors. We encourage each leader to spend 35% of their time on people management, including follow-ups and feedback. This commitment is essential for our continued success. We are entering a new phase, and I assure you that our team will remain focused on delivering consistent results, which is what you expect from us. Thank you, and have a good afternoon.