Brasilagro Companhia Brasileira de Propriedades Agricolas

BOVESPA:AGRO3

Earnings Call Transcript 2019-Q1

[Operator]

Good afternoon. Welcome, everyone, to the conference call for BrasilAgro's Q1 2019 Earnings. We have with us Mr. André Guillaumon, CEO; and Mr. Gustavo Lopez, Administrative Officer and Investor Relations Officer.

We inform that the presentation is recorded. [Operator Instructions]. Next, we will begin the Q&A session exclusively for investors and analysts, when more information will be supplied. [Operator Instructions]. The audio is being presented simultaneously on the Internet at the address www.brasil-agro.com, where you can find also the slide -- PowerPoint presentation.

Before we continue, we'd like to say that any forward-looking statements are based on the beliefs and assumptions of BrasilAgro's management and on information currently available to the company. They involve risks and uncertainties because they relate to future events and therefore depend on circumstances that may or may not occur. Investors should understand that conditions related to the macroeconomic scenario, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements, leading to results that will differ.

Now, I would like to turn the conference over to Mr. André Guillaumon, Chief Executive Officer, who will begin the conference. Sir, you may proceed.

[André Guillaumon, CEO & COO]

Good afternoon. Once again, it's a great pleasure to be with you and to share the earnings of the company for Q1. We'd like to go over the numbers in detail with you. Although it's been a year with a lot of confusion due to political instability as we had, the company was able to capture important results. I would like to thank, once again, the participation of all, then we will be available to answer your questions, clarify points about our business, the perspectives we see in the future and the year that is beginning.

You must be following -- the harvest has begun, the grain harvest has begun. Brazil began the year very well, with good rainfall, and this is very good for our company. So we have a window which is the ideal one for planting and we will share these details with you and we will be available.

I would like initially to go on to Page 2, where we talk about the highlights. So the first highlight, very important, it's a combination of our business model. We believe a lot in this model because it's a combination of factors, real estate plus production. And sometimes, we capture a lot in operational; and sometimes, we capture a lot in selling real estate.

In Q1 -- Q1 is very strong, very robust in the real estate sector and results in real estate. So in Q1, we had a net revenue of BRL270.7 million. And this represented to us a net profit of BRL136.6 million, a record, record profit in Q1. And most of it comes, as we mentioned to you, from the sale of Fazenda Jatobá. And it was recorded, this farm represented a net profit in the sale of BRL100 million. So BRL100 million of this profit in Q1 comes from the sale of real estate, sale of land, and BRL36 million from operational results. This combination, we believe, is the winning model for our business.

Adjusted EBITDA, BRL127 million. With this result, which is very robust in Q1, and also today, we're celebrating these results and paying dividends -- we're paying dividends. So on this date, the company is paying BRL41 million in dividends, corresponding to the previous year. This represents BRL0.76 per share, which represents a yield of 5.3%. This shows, once again, our concern to generate recurring results coming from operations and real estate to really compensate our shareholders. This is the great objective, the great mission, of our company and our management.

The estimate for production for here, 135,100 acres. And with sugarcane, grains, the harvest has began in some units. To date, we have all the units in Brazil already beginning to plant. We will give you the highlights. For example, Mato Grosso, the others, are a little more late. Our only unit that hasn't begun planting is the one in Paraguay. Here is an estimate for this harvest, 135,000 hectares, reinforcing the search for recurring results on the part of the company, aligned with real estate results, too.

While going on to Page #3, always -- we always bring to you the price of commodities. And we try to talk about soybeans, because apart from being very relevant in our business due to the revenue and the results, soybean has a relationship with the price of land and with the average revenue or average profitability. So we love what we bring to you. You must be following closely as us in the last 3 months. We have seen a great change in this scenario, since we have the discussion of barriers and tariffs between the U.S. and China.

This has a very important impact in the market. Soybean in Chicago, the price dropped. We were in the Brazilian harvest and this resulted in appreciation. So I would say to you that we will share next we were available to capture this appreciation in the harvest 2017/'18. And the great uncertainty in the market now is how this will affect the next harvest.

So we have Chicago below $9, and this would represent 11, since, but since we're talking about 60, 80 points, then we would have a soybean price different from last year.

A scenario that requires our attention, the company, we will see -- the company took some measures, strategic positions, with some rallies in price that we had in the campaign, with -- we had a drought in Argentina, Chicago price went up. So we were able to therefore have these results. The company is always alert, not to the unit price, but looking at margin and profitability of our assets. So it's a year that is a difficult year, a lot of concern to the company. As I began saying, we had political instability this year. And today, we have a very attractive exchange rate for the next harvest. We will see more details.

So the instability that we have before the election, the company prepared itself for future sales of dollar, capturing the volatility and the high exchange rate. Thus, we were able to absorb part of the drop that happened in Chicago. So we will see more details later on.

Well, going on to Page #4, here, we see the price of land. We see a very stable graph. So this graph shows the resilience of our sector and the good assets, which is land. Chicago dropped. And here, we see the price of land did not drop. So land, once again, is a robust investment. It is a moment of tension, it is a year when we hope that margin in the sector should drop. Soybean, for example, we have a campaign. We have already planted, and the great concern is the market for this production may be -- so we are very -- so we have to be very alert this year. We are very concerned about this year. We should have volatility in price.

Going on to Page 5. We'd like to clarify more what we call Partnership V. And here, I'd like to make an important comment. The company did not change its strategy. As I said, it's a combination of operational results plus real estate. This is the correct focus. And nothing is more important than trying to balance the results. This is what the company's management has done in the last few years. And the objective is to increase these areas where we have partnership. These are low volatility zones. These bring stability to the company's results, the partnership. And this supplements our business model. In what sense? It supplements because you have stabilization of operational results due to these areas that are more mature and allow us to be more aggressive in transforming new areas.

Every time we open new areas and begin to plant, we generate a lot of value for the land. You generate a lot of land in that asset. And together with this, the volatility drops. So the great objective of the company is to strengthen, through these partnerships, to have a generate -- recurring generation of results, allowing us to be more aggressive in transforming areas. So there's no change in strategy. What we have is the willingness, the ambition and the desire to generate more value transforming land. And this without volatility, trying to strengthen partnerships with sugarcane bringing recurring results and now with this new operation in Mato Grosso and São Félix do Araguaia.

This we will give you more details. It's the first time that we talk about this area to you. It is made up of a few farms. They are 25,000 hectares, with high productivity. So today, we should have 60% already planted. Most of the area will be destined to corn, which is already planted, soybean and corn. And now, we're concluding the planting.

So we even said this area would be larger than 25,000 hectares, but we took the decision to leave those operations, those units, and those -- that property where we have no legal risk. So we had 1 farm where we would have a legal risk. This area was excluded. There was a reduction. So now we have 23,000 hectares. This area is being operated. We brought an operator from Mato Grosso and Bahia. They are helping with the management initially. We're -- I would say we're undersized in terms of number of people. So it's an operation that gives profitability to the company, but it needs fine-tuning.

Well, this lease has an average of 10 -- that may get to 10 years. So that's the portfolio of our property, as we see on the right. The 29% of the areas are leased; 71% are our own. Here, we're talking about total planted area. If we were to take a picture of this harvest, we would be talking about 43% production in leased areas and 57% in our own land. And here it's balanced, with a leasing in areas with low volatility of production or in activities like sugarcane that give us recurring good results.

Now going on to Page #6. Here, this is a graph that we like to show, generates a lot of value to our shareholders. The evolution of the transforming of areas, with a growth of 29% in average growth. Area transformed, that means ready for planting. Here, we, during this harvest, an additional 4,000 hectares here we have seen in previous years.

Greater cycles, but there was technical change. The technical board of the company understands that it's very interesting to open an area, begin to plant to stabilize the soil and then you plant during the first year, decreasing the volatility of the first cultivation.

So these are 4,000 hectares that will be included in the harvest in 2019. We're working on a much larger surface, almost double this area. But part of this area, as I said, will be used for grass to help the soil become more mature and we will include it for plantation only in the next harvest. So we did not decrease the rhythm, but we're using a technique to decrease volatility and thus, we, part of this area is being prepared for future plantations.

Going on to Page #7. Here are the highlights. We would like to give you the grade increments in the harvest. Here, planted service, 103,000 acres going to 135,000. Most of this volume, I just mentioned to you, with the Partnership V, but it's not only partnership here, we should tell you. We -- this year, we sold an important area in the State of Bahia. It left our production portfolio. We sold 7,500 hectares. We leased another 7,500. So thus, this increment, apart from this new partnership, it includes an important transformation of land in Paraguay in the last two years and transformations here also in Brazil.

So it's an important growth that places the company in a situation to have recurring cash generation, allowing us to be a large player in the market in investments and transformation.

Here, Page 7, we have highlights estimating the harvest. For the first time, actually, not the first time, for the second time, cotton and here, we would like to mention everything that is new. We'd like to explain a little. So the idea of bringing cotton plantations into the company has the purpose of generating results, increasing revenue and also, it's very important for the real estate. We have a concentration of large properties in the State of Bahia. We believe it's an important region for the future of Brazil and nothing more important than preparing these properties, we -- so thus, generating value. So the company made the decision to begin, to continue working with cotton. The area is small, we are cautious, but we should have a growth in the production of cotton, generating cash and also helping to make our land more mature.

Here, for example, our areas, when transformation, it took some time to reach levels of fertility to then plant cotton. So we had to wait to be competitive. And now we have a portfolio in the State of Bahia that is mature. So we want to also capture real estate gains and also operational gains planting cotton. So it's not a change in tactic, it's a combination of operational result and also appreciation of real estate.

I believe you have followed our numbers, an important investment we made in sugarcane. And this year, we went from BRL1.8 million to BRL2.2 million in 2018/2019. So we have 3 operational units, 250,000 tons of grain and here supplementing. We said a few years ago, we made a promise, cattle-raising. Today, it's a reality of the company. The company has with the 2 units in Paraguay and Bahia, we have 22,500 heads of cattle. And this has allowed us to generate value without volatility. It is a tool that has helped us a lot in our business model. So we have cattle-raising and this gives us stability, an important activity to stabilize results.

Now I'd like to go on to Page 8. And we have the harvest 2018/'19 and then the estimated amount and important, growth of production. This growth is based on items that we mentioned, with the Partnership V leasing the land. For example, we see here it's important to look at these numbers because we have an important and recurring cash generation. We want to celebrate this, and we want to give a lot of attention.

As I'd like to say again, no change in strategy. We have -- we want to balance between operational cash generation and real estate cash generation. Here, we see the productivity here below us. Sugarcane, 1,850,000 tons, as I said; and 2019, you can see, 2,164,000 tons. So you all know of our acquisition, the acquisitions we made in the beginning of 2017. We made an important investment in the -- we improved sugarcane plantation. Hence, we have been trying to take these sugarcane plantations to the level we have in the South. You can see that we have enormous challenges. Our team is always available to clarify any points. Our harvest for sugarcane is different from grains.

As you can see, until now we have a productivity of 85, and you can see our estimate. I will explain. We always anticipate the harvest to harvest the time when you have the highest concentration of sugar and the areas -- the other areas at the end. You can have problems with rainfall compacting, so some areas are less productive. So what should we expect? Our productivity should go to 70 tons because we're already in November harvesting the reform areas as we call them. These are low productivity areas, then they are the final part of the harvest.

Well, going on to Page 9. Here, estimates for the harvest 2018/'19. For example, production of beef, 2,956,000 kilograms until -- we already have 517,000. Here, an important point. Cattle-raising has a seasonality according to the rainfall season. So it coincides with hydric stress. So some months of the year, the animals obtain less weight. So now it has increased with the beginning of rainfall. So although we have these 517,000 kilograms that we had in Q1, it is within our projection for weight gain for the period.

We estimate less than half of the rainfall period, so rainfall, October, November, December, January, when you have a lot of water, a lot of pasture, we have the greatest gain in weight. When you have less water, so you have less pasture and lower weight gain on the part of the animals, heads of cattle.

And I would like to remind you, it is a tool that has profitability -- stable profitability, which it's not a very high profitability, but it has low volatility. And we get BRL250, BRL280 in these areas that are being developed. So it's a tool that supplements very well with the rest of the business model.

Going on to Page #10, a little of what we said before, soybean market with a lot of stability. It has called our attention. The first table, I'd like to show what we have done. I mentioned to you that we had a price in the first months of the year, April, May, June, due to the drought in Argentina, the company, once again, respecting our policies in concerning sales. So this year, we had a new fact. The beginning of operation of Xingu, which happened in September. So we added to our production another 60,000 tons of soybean after September, when we had the discussion about taxes and the affairs between China and the U.S. It's an extra complexity for us to manage, and this shows us what we did. Today, we have a percentage of hedge, 49.7% of our production, 2018/'19 is closed, at a price of $9.80.

If we look today, the situation is totally different. As I said before, the company, when there is a lot of volatility, insecurity because of the exchange rate, we also work in the future value market and we have the dollar -- we sold at, with a value of $3.97 to reals. This is very good, but we are always alert because we have the other part, the 50% to be sold. We believe that either we will have to wait between -- the tax issues between Brazil and China, and we may also have a great appreciation. We may have a favorable impact in Brazil. We are working using other operations to really be able to capture these high prices that may come.

Well, this is the status of the sales -- physical sales, 20% sale of soybean '18/'19. So this was a brief summary.

Now I'd like to pass the floor to Gustavo and he will talk about our results and then we can clarify further points in the Q&A session.

[Gustavo Lopez, Chief Administrative Officer & IR]

Thank you to all for the participation. As André mentioned, for the company, we had a quarter where we had the objective to sell as much soybean as we could. We try to solve the issues, like transportation, in the best possible way. We wanted to sell all the inventory from previous years until January 31. We had some soybean from last year. And we made the sales to have a good cash generation of BRL7 million, BRL8 million. And we -- and this is due to all the points that we already mentioned. We had a drought in Argentina. And this gave us a great opportunity to capture this revenue.

We continue to harvest sugarcane, another 900,060 tons, with BRL1,560 per acre. And here, we must include depreciation, with a final result of BRL600. As we had anticipated last year, when we announced the sale of the farm, we recorded a result due to the sale of the farm. So we had an EBITDA -- where we have an adjusted EBITDA. Here, the EBITDA, BRL136 million -- net profit, sorry, BRL136 million, we included sugarcane. There is part of the sugarcane that are to be harvested. We also have the grains. Excluding the results, we got to an adjusted EBITDA of BRL127 million, where we are beginning the year and we are very motivated, as we were last year. We leased land in Mato Grosso for the planting of cotton. And surely, this will help us in cash generation. In the next quarters, we will give you the results.

On the next page, we have the demonstration of the results. Here, we can see gross profit, BRL143 million, gross profit. Here, you can see the sale of the farm production of sugarcane and sale of grains. This represents soybean and cotton and a negative result here from cattle-raising, because of what André mentioned, due to climate conditions, we had a drought. And we had a quarter, because of the drought, we are estimated a certain growth -- weight again and it was lower for the cattle.

We believe that from now on, we will have a positive result because of rainfall. Also, an increase in general and administrative expenses in relation to last year, especially, the payments of bonuses based on the results of last year. And also, we implemented an incentive policy for executives and recognizing the expenses, which generates the value you can see here.

We have financial, positive financial results, BRL18.18 million. These results, BRL18,689,000. We had also the sale of Jatobá Farm and Araucária. And we are, we have the indexation with the dollar. We have volatility. And here, in the next 3 months, we have these expenses. We had the U.S. -- in 4 months, we had changes in the exchange rate and a positive result. Today, we have cash invested with quarterly interest. As you can see here, our expenses, BRL4.5 million. The main effect of these financial results are here. So we got to a profit before taxes, BRL149.954 million; BRL149 million. Here, profit of BRL136 million. Last year, we had BRL20 million. So this was due to sugarcane. We had grains from 2016/'17. We had administrative expense of BRL8 million. And here, we see the values this year. We have worked on expense control. And there are -- last year, financial results were obtained when we included a new farm, Buriti. We recorded the amount, and we paid the liability we had, and this came in the results, BRL31.3 million, BRL11 million here, BRL20 million the results.

The next page. Here, we have circulating, non-circulating assets. We have the CRA at cash of BRL900 million. And part of this cash on June 30, you can see here. And as we mentioned, we paid off some loans that we had. We lengthened the duration of other loans. We see here an important growth in accounts receivable due to the sale of soybean. And recently, we sold also Jatobá Farm real estate. So BRL934 million that we will receive in the next 12 months and BRL190 million to be received in the next few years. So this, we see the receivables here.

We see that we did an analysis of the credit. We never had a cases of delinquency. So these amounts will be captured by the company when they become payable. Also, we have BRL550 million for investments at historical cost. Excluding Paraguay farms, where we had a company there. We had a partner in Paraguay, and we're following accounting rules and we had to recognize this at fair value in our year-end records. We have -- it is evaluated BRL1.2 billion, BRL1.3 billion, and it's included here. So these are total assets, BRL1.3 billion; and the liability, BRL400 million and here, BRL900 million.

Page 14. We have net financial debt of the company. As I mentioned, on June 1, we had a debt of BRL70 million, short-term debt and BRL205 million, long-term. So BRL70 million, short-term; BRL205 million. So we paid part of this, now we have BRL40 million. Total debt of BRL248.7 million, total debt. And adjusted debt, BRL247.5 million. So here, the net debt of BRL137 million; and EBITDA, BRL127 million; and adjusted net debt, 1.08x.

Here, I'd like to stress a point that we already mentioned, when we talk about CRA, our objective is to lengthen the majority of this debt and continue to develop the land. As André mentioned, we have now a lot of land that will begin to be planted. And we understand that for us to have cash and being efficient, we have to be efficient in selling farms to pay off the debt. So this is a good strategy that we are using.

Next page. Here, the payments -- the payment of dividends done today, BRL41 million. We had proposed and it was approved. Here, the mandatory dividend, we requested a payment of an extra BRL11 million, with the objective of giving a profitability close to 5%, which is a profitability we are paying, if we look at the same one we are paying in the last 4 years. There were years when we paid higher, then other years lower. And the objective, we implemented the strategy, including leasing, we -- we reduced the risk of volatility. We wanted to be more foreseeable in the future with the payments of this type of profitability. We understand that with the results, we have an expectation and motivation we have concerning the current harvest, we understand that we should be at this level or even higher. We will try to be within this amount or higher.

Page 16 now, please. Here, the challenge that we have. We, the company's management, we want to adjust the market value and book value. Here, we see that the amount that is being negotiated are close to the book values. Here, we can make a calculation with the net worth we have that we reported, plus the market value of the properties, we calculate this. We made an evaluation. And here, this includes acquisition value plus investments and we should get to BRL1.6 billion, which represents BRL28 per share.

The last page, Page #17. Here, we show the evolution of the price of shares. And we have had an excellent opportunity to buy. So here, we have the price on November 5, 2018. Hence, we see that it's an excellent opportunity for buying and obtaining gains in the medium and short term.

Thank you very much. We would like to continue with the Q&A session.

[Operator]

[Operator Instructions]. Our first question comes from Márcio Montes, Banco do Brasil.

[Márcio Montes, Banco do Brasil]

André, I have three questions. First, a declaration from the recently elected President concerning the sale of land to China. Do you believe this will affect the value of the company's portfolio? The second one, the company is looking for new land. We have areas like Alagoas and Bahia, a savanna that can be consolidated and since you have expertise in the Northeast, you could develop this region that seems to new with a good potential. And third, soybean, the price is $9.30, the company -- please talk about the price, the report.

[André Guillaumon, CEO & COO]

Well, Márcio, good afternoon, André. Thank you for the 3 questions. These are questions we could spend all afternoon, but I will try to answer in a brief and transparent way. The first, the market for land, what we believe, 2 important comments to be made. We are seeing a new government, in spite of declarations of the newly-elected President, where to a more neoliberal government and pro-market government. So this is a good reason. This will bring capital to Brazil. And there is a concern of the purchase of land on the part of China. Now talking about our portfolio and trying to answer your concern in terms of more profitable sale of land. Historically, those who buy from us, the great buyers of land, the large transactions, happen between producers. So the regulation or deregulation would bring, yes, more legal security, yes. And I always say this. Also, it would bring a rush to buy land.

So because it depends, the price of land, depends on the margin of those who plant. Now if you look at the sale of land, 99.5% are between producers, purchase and sale between producers, other farmers buying the land. There should be some changes, but it's going to happen like we saw in the Temer government. We thought they would allow foreigners to buy more, but they spent all their time with the labor reform. I don't see a different scenario. I believe the first semester, the government will work to make structural reforms. Now and then after that, we may have changes. We as an entity, not as a company, we have a very active agenda, we're always present, in the discussions with the government. The second, we have an important concentration in these regions that you mention, with the exception of Alagoas. We have a concentration in the State of Bahia, an important portfolio. We are looking for business opportunities. I believe there are some frontiers we can still capture. And I always say, the great frontier for us is the technological frontier, not the physical frontier.

These regions that you mentioned, in the last few years, although investments in infrastructure were small, these are regions where we had more investments on the part of the government than others. We had the Transnordestina railway, Ferronorte, some new railways, modern ports, new terminals in these regions. So many terminals that are -- that were built with a lot of investments. Of course, we need more. So that -- if a region that, I'd say, has potential to appreciate, we're looking at some assets in these regions, especially in the State of Bahia, where we believe there's a lot of potential. It's going to be a good combination. So we are positioned with an important portfolio. And for the time being, we have to look at the opportunities to -- we already have a lot of portfolio there to capture gains, logistics gains and others. Your third question about soybeans. I would say that -- I don't know if I understood well your question, but price of $9.80. If you look at it today, this was the right price to sell, $9.80. What do we see in the future? We will see a correction of prices due to China.

We believe the prices would drop in Brazil because of the harvest in the U.S., but it didn't happen, the prices did not drop. So this fight between the U.S. and China goes beyond the economy. So we see in the news, while China can live without corn and soybean from the U.S., they will do it. So we are trying to really sell. I'd like to say we are interested in the combination of exchange rates, Chicago and freight. So we are always looking at these 3 things, trying to maximize the return for the bags of soybean. So we are alert. I believe it's going to be a year of stability, so this -- for example, we have already begun to see more premiums, different premiums, in the State of Mato Grosso. So I believe yes, that farmers will be able to capture at $9, $9.15, $9.17, with a premium higher than 150 points, if they don't solve this issue -- tax issue between the U.S. and China. Well, you have projections, good projections for the exchange rate.

We believe that the exchange rates have internal factors that could make it lower, but also other factors that could raise the exchange rate. We have unlimited amount of flow of capital to our emerging countries, our interest rate in the U.S. now is very attractive. You have emerging countries with a risk of default, if this happens. Although we have a liberal government, we don't see great pressure on the exchange rate. And talking about the exchange rate for the harvest, April, May, although it's low, I don't see a great pressure, I don't see the exchange rate being very low next year. And we know that in Brazil, it's a fight between a new government and Congress. There are reforms, if they take longer, we may even have a higher exchange rate. I would tell you the following: It's a year with a lot of volatility, we have to be alert to really capture some gains here. A little in exchange rate, some in Chicago, taking advantage of all the opportunities. Thank you.

[Operator]

[Operator Instructions]. If there are no more questions, I would like to pass the floor to Mr. André Guillaumon for his final comments.

[André Guillaumon, CEO & COO]

Well, once again, thank you for your participation. I say, once again, these robust results in Q1 motivates the management of the company to work even harder, with more important results during this year. We are not in a comfort zone. It raises the bar, we want to perform better. We will go after even more important results than we had last year. The quarter was very important [Technical Difficulty].

[Operator]

Ladies and gentlemen, please wait while we reconnect the line.

[André Guillaumon, CEO & COO]

Well, we apologize, we had a technical problem. As I was saying, it's robust results. It brings us more challenges in the future. We have a team that is very engaged. We had this important real estate result in Q1. The company continues to make efforts. We will continue to look for new plots of land. So you should expect that the company will continue looking for assets. And once again, the strengthening of operational results, with sugarcane, grains, thus balancing very well the generation of operational results with real estate results. We are happy with the strategy. We are very satisfied. We believe that we are on the right track. The market will recognize the great work that the company has been doing. Let's continue compensating our shareholders with dividends and generating recurring results. This is what we should continue to do in the next few months and close this year with even more important numbers than the numbers for 2017/'18.

Once again, thank you very much on behalf of all our employees for the attention you dedicate to us. And we will soon be talking to you again, sharing impressive results with you. We hope that we will continue in a win-win situation. So we have -- we want products and actions that will generate benefits for all. Thank you.

[Operator]

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