Brasilagro Companhia Brasileira de Propriedades Agricolas

BOVESPA:AGRO3

Earnings Call Transcript 2018-Q2

[Operator]

Good afternoon. Welcome, everyone, to BrasilAgro's Q2 2018 Results Conference Call.

Today, we have with us Mr. André Guillaumon, CEO; and Mr. Gustavo Lopez, Administrative Officer and Investor Relations Officer.

We inform that today's live webcast and presentation may be accessed through BrasilAgro's website. Next, we will begin the Q&A session, exclusively for investors and analysts, when further instructions will be supplied. [Operator Instructions] Today's live webcast and presentation may be accessed through BrasilAgro's website at www.brasilagro.com, where we have also the PowerPoint presentation.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of BrasilAgro's management and on information currently available to the company. They involve also 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 macroeconomic scenario, industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements.

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

[André Guillaumon, executive]

Good afternoon to all. It's a great pleasure to be with you once again to tell you about our results, our earnings in Q2 '18 and also we are available to all the participants to answer questions. Once again, it's a great satisfaction to be able to share with you in a transparent way, the results, our business segment perspectives and also the results. Once again, thank you very much.

I would like everyone to be on Page 2, where we always talk about the highlights of the quarter. And here the great highlight, as we mentioned previously, the great change in terms of net revenue. In this Q2, everything that we had planned in the past, which result in net revenue -- has to do with the first 6 months of the year. And we had a good surprise, you have been following us for a long time, you have seen this, you can see the results, and you will see a great difference. The company now became a company with a robust EBITDA allowing us to continue to generate value to our shareholders, transforming land with agricultural production. This is how we manage the company.

One of the most important highlights is net revenue. In 6 months, BRL 174.6 million in net revenue, which contributed -- this gave us net income of BRL 41.6 (sic) [ 31.6 ] million. And as always, we like to show this is the best way for everyone to understand our business in terms of assets, biological assets and other factors, you will see adjusted EBITDA. So we closed this semester with BRL 31 million in net income and BRL 59.2 million adjusted EBITDA for the first semester of the year.

As you know, we have the calendar year and we have the sugarcane calendar. At the end of November, beginning of December, we closed the year with supplying a little over 1.8 million tons of sugarcane in our calendar year, and this contributed a lot in a positive way for this operational result of the company. Also the conclusion of the grain harvest, we concluded the harvest in the ideal window, the window that we had to plant grains, both in Brazil and Paraguay. We concluded the planting of the 2017, '18 grain crop. And the company, apart from planting within the window, we did it with great quality, as you will see on the next slide.

I believe that talking about numbers is easy and we have to see that we never forget the pillar that sustains all of this, which is people, so we got this: Great Place to Work. This shows the work done by the company in the last few years with people management, developing leaders, developing talent and people committed to the results. So the company won the certification, Great Place to Work. To celebrate this semester, this recognition, Great Place to Work shows that apart from working with -- bearing in mind the numerical results, we're also concerned with people for the sustainability of the business.

And here we see the price of soybean, on the next slide. I like to stress, the company monitors margin, contribution margin, the results that the company estimated, but we have to also do a follow up of prices. So we're following the scenario. We did not have anything out of the common as we had last time. We all follow as you follow the commodity market. We had a drought in the U.S., July 1 to July 30, the drought, and the company was aggressive within our hedging policy. And later on, we will see this in the results that we reach. But in general, we see the soybean market. We see Brazil maintaining within the levels of projections, 114 million tons, 115 million tons.

You know this. You can understand the South American market.

We see some news about reduction, but not significant amounts, around 2 million tons, 3 million tons, less in Argentina, but these are not affecting offer and demand. We believe in the price that is stable with small fluctuations and you are too -- we have the harvest now in the state of Mato Grosso, and we have a little more rainfall which is hurting the harvest a little in soybean. This could change a little the prices. We will see later on. We have almost 80% of our position sold in soybean, and we will be doing a follow-up of productivity. We may have some price changes. In parallel, we know that Brazilian soybean is a combination of Chicago plus the exchange rate. In terms of exchange rate, then we have a universe of uncertainties in the short term, the exchange rate.

So in the short term, there are some uncertainties, you do this follow up. For example, some reforms that the government is planning like you know. And the company is looking at the 20% that are not sold and also the next harvest, the future price of soybean. We begin to see some opportunities to do -- to make some deals. Once again, fundamentally, between offer and demand, we don't see great problems, great fluctuations. But small events, adjustments, we are always on the lookout for these.

Now Page 4. As always, we look at the price of land. Once again, we are in this position. We are working with a robust asset. We have been through 3 years of recession, economical recession, and the price of land is practically flat. Liquidity was affected, but the prices were not affected, like we see the effects in other -- for example, the house market, the housing market. So it's a very positive scenario, the price of land. Here, we can see that this reinforces the company's role. We're living now at a time of low interest rates. Historically, we know that low interest rates really makes everyone go after real investments. What we see in the future? With this exchange rate and inflation control, it's under control with the interest rate around 7%, so this will provoke an increase in liquidity of real assets. So this is a great message. This was expected. The company is capturing the appreciation of assets in the short and medium term.

Going on to Page 5. Historically, a highlight that we will say this in detail. Here, the great quantum leap of the company. Once again, the company grew in transformation and increasing the planted area. We left from 88,000 hectares, and now in 2017, '18, we have a 101.7 tons of grain. Now with recession -- I'm sorry, 101,475 hectares planted. The market is solid.

While this gave us a projection around 1.8 million tons of sugarcane, 15,800 heads of cattle, we mentioned this in previous calls, the increase of the cattle raising activity, how we see it in the company. It is a tool to generate value for transformation without generating volatility in the operational results. We had an objective. We made a proposal, and we bid on the results and today, we are very satisfied to see that the company reached this number of hectares and this number of heads of cattle. Basically, I'll say once again, focused on mitigating risk of transformation of land. So we are not a cattle raising company, but we use cattle raising as a tool for transformation of land being some -- and thus avoiding volatility.

Now we're estimating, as I said, we were able to conclude the planting within the right window. Until now, rainfall is favorable. We don't have rainfall above average, and we have a good distribution of rainfall. And until now, we have the satisfactory number, and there is an important volume of rainfall to come in the next few months, and this decreases the risks. We now have an important volume of rainfall this week, and next week, part of the production are really beyond the critical period for corn and soybean. So this makes us believe that the results can be very promising for grains.

We are going on to Page #6. Here, we see the numbers themselves. Here, we have the total, we had an estimated production of 101,000 tons, 2017, '18, and we had 101,000 [ some people are saying ]. But we had a good climate, and we have a reduction. Basically, as a strategy to mitigate risks, the volatility, we leased some land in Bahia. So when we prepared the budget, we had a goal for production and a goal for leasing land to third parties who can become buyers. And we did this last year in Jatobá. We had more -- we were able to lease more than we had proposed to the administration council. And this led us to reduce the planted area and also the expectation of production of grains. But in an important time to mitigate production risks and linked to -- also in line with our plans to find buyers for our land. So we were able to bring another operator, and within the next few years, we should make some business deals, or sell land to them.

While productivity of sugarcane, we see below grains. Here, the main number we already showed, more than 1 -- almost 1,860,000 tons of sugarcane. And in the last few years, we have been increasing numbers. You might ask yourself, why the reduction in productivity if we have this? And now, the average productivity here and here, it's important to say that we included an important asset, Fazenda São José, Fazenda São José Farm. We added this area in Maranhão and an area in partnership where we took over the sugarcane plantations. The sugarcane plantation needed investments. The sugarcane plantation needed adjustments. This is what we're doing. We began this operation in February. We had time to plant 2,200 hectares of sugarcane, and now we're beginning to plant another 6,700 hectares of sugarcane. 1/3 of this sugarcane area will be in the same standard as the one in the Midwest. These will be harvested. So this sugarcane planted in February last year will begin production in May, June. And these 3,700 hectares of new sugarcane plantations should come into production in 2018, 2019. As I said, this is our -- we have delivered consistent results doing this, this way and important results with sugarcane. And this is an opportunity to show this -- to show the growth of productivity and the appreciation of this asset.

Well, going on to Page #7, the results of the harvest 2017, 2018. Here on cattle raising, livestock, we see here number of heads of cattle. We had estimated 15,799. We reached 15,740 in Q2 '18. Here, I'd like to make a comment and show a little [ picture ] of the opportunity we captured. You have been following us and you follow the beef market. We decided to invest in cattle raising as a tool, then we had a surprise of the Carne Fraca scandal, and we said, we had a good opportunity to form an inventory at an interesting price to begin this. So we were very aggressive when buying these animals, and now 95% of our areas for pasture are already occupied with heads of cattle. So we made a good purchase when we saw that the price was favorable. The price now is beginning to improve, you know this, and the price of beef is linked to the numbers of the Brazilian economy. The Brazilian economy is improving, and we believe that this Carne Fraca operation is in the past now. It gave a terrible loss to the sector, and we used this opportunity to try to form inventory at those low prices for heads of cattle.

You can see, we have an estimate of production here, 2,414,000 kilograms of beef. And here, at the first semester is -- had a lot of drought. July, August, September, October, these are months when we had drought, when we have little rainfall so then the cattle do not gain weight. They gain weight in December, January, February, March. So we're estimating, we're very optimistic that we will get to our goal, because in January already, we see that we have gains above our projections.

Apart from reaching the number of hectares, also, we will reach number of heads of cattle, and also the ideal weight. So this is -- these are results concerning livestock and new activity. We began 18 months ago with this activity and I wanted to show you these results.

Page 8, please. A little about the soybean. We already mentioned the results of soybean. Here, we see the company's position, soybeans sold, soybean unsold. And below we show here the price practically, almost 80% was sold at the price of Chicago, $10.49, which is our average price, $10.49. And most of these transactions were done in July, August last year, and we were able to capture an interesting prime for the exchange rate. This is a combination that will take us to a result that is superior to that of our budget and we are now looking at the remainder of the soybean to be sold. The spot market does not have these levels that we have here, but we have times when we have increases in price.

So that was the first part. Now I'd like to pass the floor to Mr. Gustavo Lopez, and he will talk about the economic results in this semester.

[Gustavo Lopez, executive]

Thank you. Good afternoon. Now, we'd like to go on to Page #9. And on this page, we see EBITDA, adjusted EBITDA. The first part, EBITDA, according to accounting norms and at the bottom, we have adjusted EBITDA, the company understands this is the best way to see the cash generation of the company.

So here, we see the results. We included adjusted depreciation and in areas of grain and sugarcane harvested, and we excluded biological assets. You can see that in 6 months 2017, the results, BRL 1.9 million. And for the same period, 2018, here we have BRL 59.1 million. And this increment will be seen. We acquired Fazenda São José Farm, and also the partnership in sugarcane [indiscernible]. In the next semester, we should include the EBITDA results of the grains that we're estimating and the rest of the production and livestock.

On the next page. Here, we see the income statement. We can observe the profit -- net profit. Last year, net revenue, BRL 1.6 million last year, and now BRL 31.6 million. And reminding you that in the first semester of the previous year, we still had cash from the sale of Cremaq farm. We have invested the money in the financial market. And as of January 2017, we acquired a farm and we leased part, and we exchanged financial results for operational results. In the gross profit, we had BRL 11.4 million, and now, BRL 60.3 million. BRL 11.4 million were the results that came from the Midwest in the sugarcane farms and the inclusion of [ 70,000 ] hectares of sugarcane generated this difference, reaching BRL 60 million.

And we have here, apart from sugarcane and 1.4 million tons that were delivered during this period with BRL 38.90 per ton or BRL 1,950 per hectare. Last year, we had BRL 12 million from sugarcane, 35,000 tons at a price per ton of BRL 23.18. And this difference, we have a better productivity. We have better selling conditions, contracts, with leasing payment [ at biomass ], getting to a better margin. And this amount that we received have to do with the results of the other party. We were able to capture also this during this harvest.

When we look at the financial results, you may observe that in the previous 6 months, we had the number you can see here. As I mentioned, this was due to investments in the financial market earning interest. And this year, we have less cash, low cash, because of the acquisition, low amount of investments and we can see that the interest rate also dropped in Brazil at this time. The results, BRL 4 million, of these 6 months come from the first semester. We paid off a debt what we had for [ MT ] Farm.

Now on Page 11, we have the balance sheet. And what we can observe here, cash and cash equivalents circulating -- amount circulating assets we have on June 30, this year. We have loans that we took out from financial institutions. And our net debt, here can be seen, net debt, BRL 168 million. It's important to see that these lines in financing, we see the number here. These are short-term loans for the harvest -- expenses with the harvest. And in the next 6 months, we will be paying them off, these loans. And we have an increase in accounts receivable and biological assets, which are the reason why we took out these loans to increase our position in cattle raising activities, to buy fertilizer and to buy the inputs for the 2018 grain harvest. Reminding you that our property for investments here are in the books at cost value. We have in the treasury, BRL 25 million, reserves, BRL 68.7 million, and accumulated profit, BRL 1.6 million.

Page 12. Here, we updated the company's numbers. Net value, Brazil equity, Brazil and Paraguay and the number of shares we have. A value here, we updated this to the current value of the farms, and we see here BRL 25.63 amount per share. As André mentioned, concerning interest rates that are low, so it's an excellent opportunity now to have this value.

On Page 13. Here, we see our commitment with people management. And now, we won this certification. We continue to work hard to have a competitive team and to continue focusing on the results.

On Page 14, we have here capital markets. We see here AGRO3 and LND. We understand here the prices are pretty stable and serve an excellent opportunity to acquire shares.

Now we'd like to begin the Q&A session. Thank you.

[Operator]

[Operator Instructions] Our first question comes from [ Rafael Soni ] from Bradesco Bank.

[Unknown Analyst]

My question has to do with the sugarcane operation. Gustavo said that there was a drop in the margin. For the next harvest 2018, '19, will this margin improve for sugarcane? And also, working capital, you expect an improvement in this line. What happened during the quarter?

[Gustavo Lopez, executive]

Concerning sugarcane, in this semester, this harvest, we had -- we had the following: half of the contract in the Midwest, a little over half, we had linked this to sugarcane, the other 4,000 hectares and with a price above the market. When we leased the part of the land, we made a contract similar to the one we had in the Midwest, and using as a parameter, the sugarcane in São Paulo. And this gave us a [ billing ] following the standards. Additionally, we defined the 15,000 hectares -- they had an investment by the other party. The party to whom we leased. And this represents the price that we mentioned per hectare and leveraged the margin of the results.

What we're expecting for next year? We're expecting a little higher prices, a little higher than what we were able to get this year. The first 6 months of harvest between March and September, we had prices that were lower than in the last 2 years. We had -- this year, we had a difference that we were not able to capture, and we believe that next year we will have higher prices. The margin we're estimating 5% above the current price, but it will depend on the tonnage that we can harvest and our estimated productivity. It's still a little early to see this. We had rainfall. We're trying to understand still the growth of the sugarcane plantation.

[André Guillaumon, executive]

Additionally, [ Rafael ], I'd like to supplement. Gustavo explained very well the issue of margin, what happened in our results, and I believe you would like to know what we expect. You are probably looking at many sugarcane. No, the scenario is different because Petrobras' price policy has changed when buying ethanol and this is giving us more transparency, more security. We have more foreseeability with the new pricing plan of the state oil company, Petrobras. So they made adjustments improving -- it's a factor that contributes for us to have more security in the next few years.

I would like to add a point that will help us, going [ against an ] increase. There is a program to guarantee and equalize some problems we have in this sector. So we believe that in the medium and long term, it is a very sustainable activity and will be more transparent with the new pricing policy of Petrobras.

Concerning the question that you asked, when we analyze -- if we analyze only the cash flow with 6 months of activity on December 31, we have a problem because we have all the investments made in grains, fertilizer, and we haven't received the revenue from this. This will happen in May, June, July, the revenue. So if we look at the liabilities in the first semester, you will see that we didn't have an increase this year in liabilities because we had -- we paid off some loans. We have an increase in receivables, because the contracts, the response that you receive every month, and then a payment also at the end, January, February, March. So you have BRL 40 million, BRL 50 million that we should receive between January, February, March. And with this, we can pay all the debts we have. So I would like to say this: that we would like to have a longer duration because there are many debts that are in the short term, and we will work on this in the next few months.

[Operator]

[Operator Instructions] Since there are no more questions, we'd like to pass the floor to Mr. André Guillaumon for his final comments.

[André Guillaumon, executive]

Well, thank you very much for being with us. And once again, we shared with you the partial results, and we'd like to reinforce our message. We will continue working with our hard work to deliver more and more solid results.

Here, we make a comment. The company has a positive EBITDA, and we know you all know that the great strength are the results from real estate. So we're on a new level, a company that delivers operational results, independent of the sale of land and this was a great concern that some investors had. It is a period when we are beginning to sell assets in a more intense way, while our clients, our rural producers, those who produce soybean and grain and these farmers see -- they have to know that there will be a good harvest. So we should expect that the company in the next few months should announce real estate transactions that will add to this operational result that we showed to you.

Once again, thank you very much, and we are available for any clarifications through our Investor Relations Manager, Ana Paula and Gustavo. If you have questions, please get in touch with us and we are very interested for you to understand our business model. It's an innovative model, and you will understand our assumptions and value generation.

Once again, thank you very much for participating in this call. We are available, and we will continue with hard work in the next 6 months to deliver important results. Thank you.

[Operator]

Thank you. The conference call is now concluded. We thank you all for your participation and wish you good afternoon.