SLC Agricola SA

BOVESPA:SLCE3

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, ladies and gentlemen, and thank you for waiting. At this time, I would like to welcome everyone to SLC Agrícola First Quarter of 2021 Earnings Conference Call. Today, we have with us Mr. Aurelio Pavinato, CEO; and Mr. Ivo Marcon Brum, CFO and Investor Relations Officer. We would like to inform you that this event is being recorded. [Operator Instructions]

Also, today's live webcast, both audio and video, slide show may be accessed through SLC Agrícola's website at ri.slcagricola.com.br, in the Investor Relations section by clicking on the banner Webcast 1Q21. The following presentation is also available to download on the webcast platform. The following information is available in thousands of Brazilian reals and in IFRS, except when otherwise indicated.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of SLC Agrícola's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of the company and could cause results to differ materially from those expressed in such forward-looking statements.

Now I will turn the conference over to Mr. Aurelio Pavinato, CEO. You may proceed.

[Ivo Brum, executive]

Good morning, everyone. Thank you for participating in SLC Agrícola's earnings conference call for the first quarter 2020. Let's turn to Slide 3, please. I want to start by going over our current strategy, which is based on these 4 pillars: asset-light growth, distance from the average on efficiency, financial strength and value creation for our shareholders and ESG stewardship. We will explain over the following slides how the main operational and financial deliveries in this quarter connected to these pillars.

Let's go now to Slide 4. We advanced in our business combination with Terra Santa on March 26. We gave notice to the market on the signing of the final documents for [ for review ]. The next steps for this business combination, as we can see on this slide, are the extraordinary general meeting for both companies to occur in June as well as the course of 60 days period for any opposition by Terra Santa creditors. With that, we expected the closing to occur in early July, when we will effectively take over the operation.

We can change to Slide 5, please. In addition to the deal with Terra Santa on April 8, we disclosed another relevant deal in line with our asset-light growth plan, the lease agreement with Agrícola Xingú, through which we assessed an area of 39,000 hectares distributed within the municipality of Correntina in Bahia and Unaí in Minas Gerais state, with a total planting potential of 43,000 hectares.

As you can observe in Slide 6, we estimate that this operation combined should increase our total planted area potential for 2020/'22 (sic) [2021/'22] crop by 40%. That is we expected to achieve 660,000 hectares for the upcoming crop.

Moving on to Slide 7 shows the location of current farms together with the production units of Terra Santa and Agrícola Xingú for an integrated view of geographical footprint after this important transaction.

We can now advance to Slide 8, please. Here, we make the point that our product mix after the TS incorporation should remain virtually unchanged, given that on these new areas, the same crops were already being planted.

On Slide 9, we connected these 2 deals to another of our strategy pillars, ESG stewardship. The leased areas resulting from the transaction with Terra Santa and Agrícola Xingú are fully aligned with our expansion strategy based on the mature areas, with high production potential and compliance with our environmental criteria.

The company draw on our resource to ensure its activity are sustainable and responsible by implementing global best practices for our large-scale agriculture to cause positive environmental and social impacts where it's operated, supported by its low-carbon production model, which helps to minimize climate change, in line with its Big Dream.

On that note, it's worth mention that on our earnings release on the ESG section, we explored the implemented effort towards better communication to this topic, which today is present in all of company's disclosure material. We invited all to consult the data in order to better understand how we have been working on this front.

To close the section, on Slide 10, I will comment on the pillar distance from the average and inefficiency. For the fourth straight year, we present a new record in the soybean yields. For 2020 to '21 crop, for each harvest was already concluded, productivity on soybean was 5.7% above our initial projection and 12.7% above the national average.

Let's go to Slide 12, please, where we bring some figures from our income statement for the first quarter of the year. The net revenue advanced 31% in first quarter '21 compared to first quarter '20. For cotton lint, a higher value-added product, the volume invoiced in the first quarter '21 was 23% higher than first quarter '20. Also, all crops reported higher unit price compared to the same quarter last year.

Adjusted EBITDA was BRL 272.5 million, representing growth of 49% on first quarter '20. The main factors in this variation where the higher realized gross income for the soybean and cotton seed in the comparison years. Net income advanced 141% in the first quarter '21 compared to first quarter '20 to BRL 376.8 million. The main factor contributing to the increase was the variation in fair value of biological assets for soybean, which increased BRL 425.7 million in the first quarter '21 versus first quarter '20. The variation in biological assets reflect margin expectation for the crops harvest on the period, and this increase is explained by higher price and yields on the soybean crop if compared to the previous year.

Let's go to Slide 13 now, where we present the quarter's adjusted net debt, which ended the first quarter at BRL 918 million, increasing BRL 209.5 million from the end of 2020. The increase in leverage was due to the negative free cash flow in the first quarter reflects the higher working capital needs due to the payment of inputs for the current crop, which is natural at the time of the year. The net debt-to-EBITDA ratio consistent at 0.87x.

To conclude this part of the presentation, let's advance to Slide 14. The company's good financial results with significant free cash flow enabled the maintenance of healthy leverage ratios and also distribution of dividends. On to date, we are paying BRL 200 million to our shareholders, which added to the BRL 32 million paid in November as interest on net capital reached a total of BRL 232 million distributed and related to the 2020 fiscal year results.

I will now hand the call back Aurelio Pavinato for the brief overview of the commodities market outlook of the remainder of 2020/'21 crop year.

[Aurelio Pavinato, executive]

Thank you, Ivo. Please, let's turn to Slide 16, where we present a chart with the comparison of the international prices in [indiscernible] hundreds for our main products from January 2020 through April 2021. For cotton, the scenario of downward revisions in U.S. production over the previous months is still regarding 2021 crop, combined with the initial expectation of the crop losses on the country for the '21, '22nd season, giving the drought on the main productive region having been the main factors behind the price movement on the supply side.

The recovery in global cotton consumption with the surmounting of mostly uncertainties related to the pandemic is the factor that mostly contributes for the global supply and demand balance to close this cycle again with a deficit of approximately 5 million bales according to USDA data.

In soybean, the market expectation is that the balance will also close the second year with tighter inventories, with consumption surpassing output in a volume of around 6.4 million tons. This occurs after a deficit of 18.1 million tons over the '19/'20 crop year. In addition to that, we have the weather market, which focuses now on the evolution of the planting and crop conditions for the USA.

As for corn, over the last quarter 2020 and first months of '21, the scenario of strong demand continued to support prices in Chicago. Uncertainty on the scale of the U.S. export program and also on the size of the Brazilian crop should remain as key point behind the price volatility on the external and internal markets.

In Brazil, first-crop corn producing regions in the south faced adverse weather conditions, and significant uncertainties on the size of the second crop remain. In most cases, official downward revisions on yields are expected.

After this brief market update, let's advance to Slide 18, where we presented an update of yields for our crops on the current season. We had already commented on the excellence performance for soybeans. In cotton, we are maintaining our initial expectation given the crop's current good production potential.

For corn second crop, however, we are revising our yield expectation downward in 20%. The late soybean planting in Mato Grosso and the dry climate in April, mainly on the farms in Mato Grosso do Sul were the reason behind this loss of production potential. On the relative comparison, our yields in cotton should be 2% higher than the national average. And in corn, [indiscernible] above the Brazil's average for second crop according to CONAB's currently estimate, which is expected to be revised downwards. This crop loss in corn, however, will be fully offset by better sales price, given the continued improvement in quotations over the previous months. Thus far, no impacting margins for this year.

We can now go to Slide 19, where I will conclude with commentaries on our current value position. An excellent level of international prices for all of our products, combined with a still weak Brazilian real, have enabled good progress in hedging for the 2021 crop year. As for the '21/'22 season, at this point, we already considered the expected production from Agrícola Xingú to calculated hedge positions.

With regards to input purchases for '21 and '22 crop year, to-date, we have acquired all the phosphate and potash fertilizer we need for the new crop year as well as most of the chemicals. Considering the current scenario for dollar-denominated costs and prices as well as the current FX rate, we expect to maintain our good profitability levels in '21/'22.

Thank you. And now we'll open the call for questions.

[Operator]

[Operator Instructions] Thank you. This concludes today's presentation. You may disconnect your lines at this time, and have a nice day.