Brasilagro Companhia Brasileira de Propriedades Agricolas

BOVESPA:AGRO3

Earnings Call Transcript 2018-Q3

[Operator]

Good afternoon. We'd like to welcome you to BrasilAgro's Q3 2017 (sic) [ 2018 ] Results Conference Call. Today, we have with us Mr. André Guillaumon, CEO; and Mr. Gustavo Lopez, Administrative Officer and Investor Relations Officer.

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] The audio is being presented on the Internet, too, at www.brasil-agro.com, where you will also find the slides and 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 risks and uncertainties because they relate to future events and, therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, industry conditions and other operational factors may affect the future performance of BrasilAgro [ conduct ] to results that will differ materially from those expressed here.

Now I'll turn the conference over to Mr. André Guillaumon, CEO, who will begin the presentation. Sir, you have the floor.

[André Guillaumon, executive]

Good afternoon. It's a great pleasure, once again, to be here in Q3, talking to you about the results of the company due to a strategy at all levels in the company, and this work has been helping the company to have expressive and recurrent results in the last years. So we hope that this work will continue concerning the company's strategy and the clear objectives. So once again, it's a great satisfaction to share with you our time and to be totally available for questions at the end of the presentation to clarify the way we work and the objectives we have for this year. And we will be talking about Q3, and we'd like to say that most of the harvest will be booked in the next quarter. We have very good perspectives.

I'd like to call your attention to the highlights. We closed the quarter with a net revenue of BRL 225 million; net revenue, BRL 77.7 million; and adjusted EBITDA of BRL 7.1 million (sic) [ BRL 70.1 million ]. Also, we would like to say we haven't recorded all the results concerning the sale that was announced to the market yesterday night of a unit in the Midwest. Later on, we will go into details about this sale. It's an important transaction that places the sale of BRL 60 million, which will generate an accounting results around BRL 35 million, BRL 36 million.

It's worthwhile stressing it's a sale of a small area. So we give up a recurring operational result in sugarcane for a revenue, net profit of this transaction of BRL 35 million, a sale that represents very little, reducing the EBITDA, and an important result in showing that, once again, we trust -- we were always after this strategy where we will align operational results with real estate results and always getting to the sum of both, where we concluded the quarter 90% of the harvest. Later on, I will go into detail about the harvest and the reason a very good harvest. Everyone saw Brazilian numbers. It could not be different. Later on, we will talk in more detail about the revenue.

Well, these are the highlights. Let's go on to Page 3. Let's talk about the soybean market. Here, there something I'd like to clarify. Although we have other cultures, it's important we have also others, but it's important to talk about soybean because there's a relationship between liquidity prices, land and price of the grains. So soybean is important for the value of land. I believe you have all seen what happens. The company, I stress once again, we're after contribution margin, and when we begin to sell soybean a lot before the harvest, when we began the harvest, we had already 80% of our soybean sold. And then we went back to the market not only with 20% but 20% plus the excess production.

Well, what happened this year in the market? We've been seeing, especially in Argentina, that was going to produce 54 million tons. The first results showed the drought, and there was reduction of 47 million; then 44 million; another drop, 40 million. And today, the number is close to 37 million tons in Argentina. In other words, this reduction in the offer of soybean, together with an important international gain between U.S. and Russia, actually raised the price, something that we have never seen before. So the highest price was after the harvest. Today was the opposite. This year was the opposite. So during the harvest, the price went up. During the harvest, the price of this commodity went up because of these 2 reasons: a strong drought and, therefore, a rush for purchases going to China. And this gave us a premium that we never saw in history. Normally, the market had premiums of 45 -- between $0.45, $0.60, $1. And this year, it got to 150 points. We're talking about $1.50 extra. So although soybean is around 10 10 50, as we will see, we had $1.5 more, which sent soybean to $12. So together with the production that had a good influence with the climate and also our strategy to mitigate volatility from our portfolio, but we will see more details later.

So this is -- on Page 4, we see the price of land. I would say that it is a market that continues with flat prices. We don't see a rise in the prices, but we believe that the sum of stable prices for land, like we always say in the calls, it's an asset that is very solid and gives us security in our investments. In the last 3 years, we had a crisis. Most of the sectors suffered great reductions in billing, in value. And our core business, land, continues with a little lower liquidity, but prices are pretty stable, showing, once again, that investors are investing in BrasilAgro because it's a safe investment. This market with stable prices, and now those who sell land now have good harvest, so in the next few months, we should see more liquidity for land in Brazil. So we should see a small rise. I'd like to say that we expect a positive -- positive small rise in the price of land.

So this is always a concern. BrasilAgro is alert to its trade-off, to exchange our operational results for real estate results or vice versa. It's a combination of both things: to generate operational results and generate also real estate results. So the company changes its strategy. We have talked about our actions and, thus, today, the sale of assets that generate good yields. So it makes sense sometimes to sell.

Going on to Page 5. Here, we give you more details about the transaction that I called the fifth part of Araucária. We bought this asset in 2007, beginning of 2007, and we began to demobilize 5 years later. And more recently, we made a sale of 975 hectares, of which 660, for us, they represented -- they have a value of BRL 11 million, and they were sold at -- for 1,208 bags. This is the present value of the transactional -- nominal value, BRL 61.5 million. So hectare being sold at more than BRL 90,000, both -- so BrasilAgro is working and making this market go forward. We'd like to stress a sale that generates an accounting results around BRL 35 million, BRL 36 million, and we give up an EBITDA of 2,600 hectares with sugarcane. We're talking -- we're giving up and recurring a bit, BRL 1,800,000, for an important profit of BRL 35 million. This is to show how we create these 2 types of value generation for the company. Valuing -- attaching value to the operational result and also the price of land. And thus, this helps us to be sustainable. It's important to sell, but it's also important to have good results on the operational side.

We have here -- these sales are being done with contracts, with the sugar mill and as the company has a better performance. We have a contract in volume. Every time we increase the average productivity, we have more hectares available for sale. And this has happened in these units in the Midwest. Productivity has been growing year after year. Longevity of the sugarcane plantation is increasing. Our renewal rate has been decreasing, and this gives us a generation of net assets as a result of this without compromising the generation of operational EBITDA from sugar in this region because of these factors. The production income continues the same. The sale is not in the numbers that I mentioned, and Gustavo will talk about we will see these results in the next quarter.

Going on to Page 6. Here, we have an evolution -- an important evolution of the results from 1 year to another. The company, in 2016, '17 and in the next harvest, had an increase in planted surface and also greater results, 15% in area. Since we have this growth focusing on sugarcane plantation and operational and financial -- in financial results, this represents much more than 15%. We're increasing 15% in sugarcane plantation, which traditionally generates a result of 3, 4x more than soybean per hectare. So when we look at the -- we're having an increase in the planted area, it's an important increment also in operational results, placing the company at very good -- in a very good situation in relation to previous years. So this is what we see, the harvest of 1.8 million tons sugarcane and it being an important supplier. And here in our strategy, we see a constant strategy searching for operational results and balancing this also with real estate -- sale of real estate. When we talk about 1.8 million tons, we're talking about an important service with long-term contracts, and this generates for the company's investor a security that this result will have stability due to the culture. And also, we have contracts from 8 to 15 years.

So we have been seeing this -- our search for operational results. Cattle raising overcame our expectations. We reached at the end of Q3 20,700 heads of cattle, 30% above our objective for the year. And once again, we say what we always said, cattle raising is an instrument. It's a tool for value generation in the transformation of land and to mitigate problems in operational results. So we had a growth. This means that the company has great capacity and transformation of land and generating value, decreasing volatility. So it's not only these 2 strategies. We also leased land in the areas where we have volatility in production, and this contributed to this expressive result.

So it was a good year. It was -- if we look at the volumes of grain, it was an average year. If you look at the volume of [indiscernible] search for results. We have [indiscernible] leasing of land, our land to third parties where we have production [indiscernible] recurring. We have this strategy that has come to stay. This will contribute for -- when we have exceptional years in terms of climate, the results will be even higher. So this is -- so the factor here is not only the climate, it's the strategy going after the objectives that we planned at the beginning of our management.

Now going on to Page 7. Here, we see more details of the crops' productivity and area. So here, we didn't have -- the harvest had not ended, but until these dates, we had an increment in soybean production of 35% more. This number, there is a reduction in the total productivity due to a reduction in the planted area. So basically, we closed the year in terms of grains with an expressive result. I believe that in the final closing, we will be closer to 40% increase in productivity than the 35% that we reported at the end of this quarter. So this increase in productivity, together with the -- also with the increase in the price of soybean, had an important result for us, and this helped a lot to generate the results during this quarter.

Now going on to Page 8. Here, we see the results of cattle raising and sugarcane. Cattle raising. We'd like to remind you, cattle raising is a daily activity. So it is not seasonal like grains. So when we take a picture of cattle raising in March, we still have 3 months when the cattle will increase in weight. So we still have another 3 months for these 20,700 heads to gain weight. So we are having an excellent performance in cattle raising with important indices in the case of Paraguay and also Jatobá Farm. Jatobá Farm was -- used to be destined to agriculturing, now cattle raising. It has -- it allows a large number of head per hectare, and we've seen a constant recovery in this farm. As you know, in the beginning, it was leased, and then we began to work on the pasture and the results. So we -- it does not have results like the others, but it is important for volume because it's the largest area for cattle raising.

Well below, we see productivity of sugarcane, where in 2016, we had 870,000 tons; in 2017, 858,000. And here, I'd like to mention the 15% that I mentioned in the previous page. The growth in the area, although it was 15%, it was significant to represent the growth of 1 million tons in sugarcane. So this operation, Fazenda São José, increased the results by 1 million tons. And we hope to increase productivity to the levels to be similar to the ones in the Midwest. We have -- and we -- in terms of this, we are making progress with irrigation, too. So we should have a constant increase in tons of sugarcane per hectare in the next few years to be able to go to the levels that we had only in the Midwest. So we see an important increase of 870,000 to 1,800,000, and we see a reduction in the [ IPCH ]. This inclusion of land -- this land was pretty weak, and now the company is using the best techniques to renew the sugarcane plantations. Gustavo will mention the investment we have made. And we had a very high cash situation. This cash is being transformed to generate operational results. So this is important for you to know. Most of our cash was used to renew the sugarcane plantations in this operation.

Going on to Page 9. Here, the hedging situation of the company, we'd like to remind you, like we said in the beginning of the presentation, we're always working on margin. When we decide to sell or to hedge, we also decide to do hedging or purchase to guarantee the margin expected per hectare. So this summarizes the harvest, the prices we reached. So here below, we see that we had an average price in Chicago, 10.46, an average dollar for this production, to 3.37, 3.40, the exchange rate. So this is the picture when we were planting in November. And this is guaranteeing these important results per hectare.

Well, I'd like to conclude. Gustavo will talk about our accounting results, and he will talk about our operation in Paraguay and the end of the joint venture.

[Gustavo Lopez, executive]

Good afternoon. We'd like to continue on Page 10. We -- so this is a joint venture we had with [indiscernible], an Argentinian company, a farm where we saw a lot of potential for cash generation and also land appraisal in the long term. We believed in this project. The results during the first 2 years were excellent. This year too, we see this trend, excellent results. And we wanted to increase the rhythm of development. And we decided to separate from the part. First, we tried to sell, and -- with the sale of this farm, and we decided to form 2 blocks where we were producing 7,000 hectares. And we have another 7,000 ready to plant next year. When we began the separation, we defined that we would use a new company that we created as -- to end the joint venture. And on February 9 this year, we transferred the assets. So here, you can see there is no payment involved, and we have a mandate to recognize this in our numbers through the fair price of these assets. This generated a result of BRL 5 million between the accounting value that we had and market value. Additionally, this investment was made in 2012, and this represented for us BRL 78 million. And this investment that had been made in U.S. dollars at the exchange rate of BRL 2, and it continued to appreciate, the value rose, the exchange rate also went up. And we -- at the time that we recognized this new operation, we had BRL 30 million, and we considered it as a result of the operation. This transaction, BRL 35 million of impact in the results, and we recognize this, this month. It's important to mention that all our properties are -- they're at cost value, and we recognize this at the time of the end of the joint venture.

Here on Page 11, we can see there's EBITDA calculation, EBITDA and adjusted EBITDA. We saw that this would be the best way of making this calculation. We saw that we analyzed the 9 months, and we see here the calculation. We are recognizing here we excluded the impact from this calculation, and we see that we had a gross profit of BRL 94 million. As we said, we had the increase in productivity in sugarcane, better practices that we introduced in areas that we already had with soybean and now we're using for cattle raising. So we have an important growth, and we went from a gross profit of BRL 18.9 million to BRL 94 million. And we excluded here some gains because we have until June 30 to end the harvest. So here, we have 35%, 38% of the harvest already recognized, and the rest continues as a biological asset. And excluding revenue from sale and administrative expenses, we added the part that was already recognized. We excluded the adjusted depreciation in these areas that were considered, and we got to an adjusted EBITDA of BRL 70 million against BRL 12 million negative that we had in the 9 months of 2017. I'd like to mention that the BRL 70 million will become recurring in the next areas. And the main engine is the planted service with sugarcane. We have 5,000 hectares in leased farms, and we included this last year. And as of this harvest, we will have them.

Going on to Page 13. We have the income statement. Here, we can see net revenue from sale had a growth, an important growth, BRL 71 million. And you can see in revenue from sugarcane, we see the numbers that André mentioned with a relevant impact. Here, we have 30,000 hectares of soybean. We have already 9,000 to 10,000 already harvested. The rest is biological assets. And in the next quarter, we will see the impact of the total harvest. When we see net revenue of the farms, including biological assets, a growth of 7 -- from BRL 77 million to BRL 225 million and gross profit going to BRL 95 million. And when we see the remaining lines, we see the part already sold, and administrative expenses were always a challenge. We did not have -- this increase that we see here has to do with the joint venture we had in the past. Now it is consolidated, and that's why we have this increase.

In other expenses, other revenue, in this line, we have the effect that we mentioned. Here, due to the separation from the company, the end of the joint venture, and here, it's important to mention, before the separation from the company, we had loans with BrasilAgro and also the company, [indiscernible], and we had made a plan. We understood that there was a contingency if we continued with these loans. So we decided to give up part of the interest we had, and we see the generation of this profit here at BRL 14.7 million. But as an offset, the expenses are also, as financial expenses, growing, growth in the line of financial expenses. Part of this BRL 16 million is from this reason.

Today, most of the financial revenue we had is here, but we're investing most of the cash flow in investments that will then generate more cash for the company. When we look at the profit before taxes, BRL 109 million, we have tax, BRL 85 million, and in comparison with the same period of the previous year, we see that the growth was exponential. So we had in the quarter, in Q3, we see the main effects were the -- recognizing biological assets, a good production of soybean for this harvest and the impact that I mentioned.

Page 13, we have the balance sheet. We have the balance sheet with less cash than the company used to have, but we have had a growth in receivables. Also, the -- we have inventory available for sale and biological assets that will become inventory, and we will have the results in the next few months. We also see that there is a great growth in these 9 months, 40%. And we see, as an offset, we had some growth in the liabilities of the company but not as much as the growth that we saw in the assets of the company. It's also important to mention that this growth, we have recorded all the farms at cost value, and as of March 31, we will have the farm in Paraguay at market value. We have short-term loans, BRL 89 million, that if we compare with the receivables we have until March 31, we have to also -- we still have 60% of the harvest to be carried out. Today, these loans and long-term loans have had this growth, as you can see, due to the increase in the planted area of sugarcane. And this will help us to have more cash generation. We see the net equity here with a profit, BRL 85 million.

Page 14. We can see here, on the left, we have here the shares and the price of the shares, BRL 12.60 per share. And here, we included the market value of the product of the land. According to -- we had a recent evaluation by Deloitte, and we got to a value -- we got to a net value, as you can see here, showing that the company shares are an excellent business.

On Page 15, we have the evolution of the price of our shares.

And thus, we would like to conclude, and now we'd like to begin the Q&A session.

[Operator]

[Operator Instructions] The first question comes from Mr. João Pedro Soares from Bradesco.

[João Pedro Soares, analyst]

If you could share with us the price of corn. We see production dropping, unfavorable climates. Do you believe the price has already reached a good point?

[Unknown Executive]

I will try to talk about demand. Well, we have -- we know that Brazil has -- 2/3 of the volume of corn is produced in the second phase, and 1/3 in the first phase of -- so we begin to plant the second part in October. So this -- when you plant the first wave -- when you wait and you delay the first phase, you also delay the second phase of the planting. So in the delay of the second, we have the beginning of the dry season, less sunshine and also less rainfall. This is what we had in December. And we expected a reduction due to the delay in beginning the plantation. So the Brazilian harvest, we're talking about a harvest of 90 million. This was reduced to 85 million. Some agencies talking about 82 million. So we -- but we know that the second phase, we won't have a reduction. And also, this affects our parity for exports. Brazilian corn is becoming interesting abroad. Last year, we had 90 million. 33 million to 35 million tons were exported of the 90 million. And this year, we have between 6 million to 10 million tons left. So you have an export parity that is more interesting. So we should be exporting more because of the exchange rates. And the third pillar that regulates the offer, which is the consumption of meat. So we have seen an improvement in the economy, and therefore, this represents an increase in the consumption of beef and also poultry, chicken. We have some challenges in terms of sanitation. In this, we have sanitary barriers. But -- so we will sell 100% of our soybean, and we will see -- we will look at the possibility of exporting part of our corn. So we expect that the price of corn will go up in the domestic market. So this is our vision for the next 3, 4 months. Thank you.

[João Pedro Soares, analyst]

[ Another ] question. In terms of consumption, sanitary conditions, we've seen the price of chicken reacting, and we're expecting an adjustment in capacity for the second semester. Do you see any sign of a drop in consumption of protein?

[Unknown Executive]

Well, signs for the second semester, no. What we saw, we have corn. The price of corn has gone up from the beginning of the harvest in March until April. And farmers harvest first soybean. So the price of corn came to -- the corn came to the market. The summer corn came to the market. And now the price has stopped rising. We have now the food. Corn reached BRL 32, BRL 31, then went back to BRL 30 per bag. I believe in the second semester, it will be a semester that will be attractive for the price of corn. If we look at 2015, '16, we see a reduction in the industry, knowing initially there is space. We're talking about a small growth in the economy. And I believe that exports will have an effect in the second semester. Thank you.

[Operator]

Now I'd like to pass the floor to Mr. André Guillaumon for his final comments.

[André Guillaumon, executive]

Well, once again, I'd like to thank you all. On behalf of our company's team, we have a strong commitment on the part of the company and its employees in terms of being an innovative company, looking for strategies that will bring recurring increases in the real estate value and also without forgetting the important thing, which is cash generation and the operational results. So it's not enough to have good results 1 year but not have recurring results. We want recurring good results, and thus, we have been looking at each project with greater visibility, with constant search for an EBITDA, a robust result, and it has arrived. We hope that year after year, we will have these numbers. So we're not here to have good results 1 year and then not anymore. We have leased -- you know the market lease contracts are 5 years. So the decision-making and strategies are here to increase the EBITDA, and they're all in mid and long term. So yes, we want to have a company to deliver recurring -- strong recurring results. And we are -- also have, again, excellent results in terms of land value, real estate results, always looking at the results with balance. Our generation of results should be balanced, and this is what makes us different from the other companies. We're not looking only at operational results nor only results in real estate. So our management is here to increase the growth and the generation of results for the company.

Thank you very much. And once again, thank you for participating. And we are -- we continue to be available with our Investor Relations team. Please, if you need any further clarification, talk to us. Thank you.

[Operator]

So we'd like -- thus, we conclude today's conference call for BrasilAgro. Thank you.