SLC Agricola SA

BOVESPA:SLCE3

Earnings Call Transcript 2023-Q1

[Rodrigo Gelain, executive]

[Interpreted]

Good morning, everyone, and welcome to SLC Agrícola's video conference call on the first quarter of 2023. My name is Rodrigo Gelain, I am Financial Manager and Investor Relations Manager. Here with me are our CEO, Aurelio Pavinato, and our CFO and IRO, Ivo Brum. It's a privilege to be with you this morning. This video conference is being recorded and will be available from the company's IR website where you can find the presentation as well. [Operator Instructions].

We wish to stress that the information contained in the presentation and any statements that may be made during the video conference regarding business prospects, projections and operational and financial targets of SLC Agrícola are beliefs and assumptions of the company's management and are based on information currently available. Forward-looking statements are not guarantees of performance as they involve risks, uncertainties and assumptions. They refer to future events and therefore, depend on circumstances that may or may not occur.

Investors should understand the general economic conditions, market conditions and other factors may affect the future performance of SLC Agrícola and lead to results that differ materially from those expressed in such forward-looking statements. I now turn the floor over to our CEO, Aurelio Pavinato who will start the presentation. Pavinato, you may proceed.

[Aurelio Pavinato, executive]

Thank you very much, Gelain. Good morning. We thank you for participating in SLC Agrícola's video conference to discuss the results of the first quarter 2023. Let's move to Slide 4, please, where we will comment on the current market scenario. The first quarter of 2023 was marked by the downward trend in cotton prices, both internationally and in the Brazilian market. The main factors were expectations of a global economic downturn, combined with a risk aversion approach by the market. A decline in global consumption forecast impacted by the scenario of lockdowns in China, which should cease to be a negative influence for the '23, '24 crop year as the Asian country reopens.

As for the positive expectations regarding the current market, we can mention the following. The United States, the world's largest exporter of cotton, will see a significant reduction of approximately 18% in the planted area for the '23, '24 crop year according to the USDA. The weather forecast is below normal rainfall and high temperatures for the Texas region according to the U.S. drought monitor on May 9, 2023. The U.S. apparel market, 1 of the main sources for the demand for cotton remains firm according to the U.S. Census Bureau.

Sales of textiles in the first quarter of '23 totaled $64.9 billion compared to $63.3 billion in the same period in the previous year. Domestic consumption in China should increase by around 1 million bales during the '23, '24 crop year according to the USDA report released on May 5. And moreover, the -- the planted area in China should reduce and there is a forecast of reduction in 10% because the climate in the previous season was very positive.

Another positive sign of the resumption of consumption in China is evident from the weekly net sales between the U.S. and China. In the last 2 weeks, the average weekly net sales from the U.S. to China amounted to 150,000 bales against an average of 44,000 bales in the previous 4 weeks.

Now let's move to Slide 5 to talk about soybean. Soybean spot prices quoted on CBOT and the prices paid for the grain based on Paranaguá SAPEA maintained their downward trend during the first quarter of 2023. This behavior was impacted by the following: entry of the Brazilian harvest and a stronger Brazilian -- real growth of 23.3% in soybean production from 125.5 million in '21, '22 to an estimated 154.8 million tonnes in the '22/'23 crop year, according data from CONAB, may 2023.

In the world for the '22, '23 cycle, the supply demand balance in the world should register a surplus of approximately 6 million tons after a deficit of 4 million tons in the previous crop year. For '23, '24, it's estimated that global production will reach 24 million tons higher than consumption. This USDA projection takes into account bumper harvest in the U.S. and Brazil and a recovery in Argentina returning to the level of 48 million tons of soybean, the same level as in 2019, '20.

Brazil will play an important role this year since Argentina, the world's third largest producer of soybean register a shortfall of nearly 49% compared to the previous year due to the hot and dry climate during the crop development period.

Moving to Slide 6. Let's discuss corn. Corn prices for spot contracts in the CBOT and in the Brazilian domestic market were highly volatile in the first quarter of 2023, staying at around USD 6.50 per bushel. The main reasons for this price level were losses of approximately 18 million tons in the United States during the cycle '22, '23 and losses of around 15 million tons in Europe. And with the decline in production in the U.S. and Argentina, Brazil has become the world's largest exporter of corn. Argentina has also been reporting important losses in the current year according to the Buenos Aires Grain Exchange, the country is estimated to produce approximately 37 million tons, which is 27% lower than in the previous harvest and 23% lower than initial forecast. The Russia-Ukraine conflict -- and since Ukraine is an important corn exporter -- well, Ukraine produced 42 million tons in the '22/'23 crop year against 27 million tons expected for '23, '24. And the projections for '23, '24 are of just 22 million tons.

In the global scenario, the difference between supply and demand should result in a deficit of around 12 million tons in the '22/'23 year. As for '23/'24 according to the USDA, there should be a surplus of 26 million tons worldwide, driven by strong growth in production in the U.S. in both planted area and yield recovery in Argentina and maintenance of pace in Brazil.

Now I will turn it over to Ivo Brum, to comment on our financial performance. Ivo,you have the floor.

[Ivo Brum, executive]

Thank you, Pavinato. Good morning to all. Can we please go to Slide 8 for some highlights of our income statements. Net revenue ended the first quarter at BRL 2.2 billion. We started the year with excellent first quarter results of BRL 575 million and net margin of 25.9%, driven chiefly by the mark-to-market adjustment of soybean biological assets that is margin from this crop. Adjusted EBITDA was BRL 934 million with adjusted EBITDA margin of 42.1%. Cash generation in the quarter was a negative BRL 443 million mainly due to the payments made for acquisition of inputs for the crop year. We also paid out BRL 180 million for the first installment of the acquisition of 12,500 hectares of the Paysandu farm, as announced through a material fact on February '23.

Let's move now to Slide 9. Adjusted net debt ended the quarter at BRL 2.9 billion, increasing BRL 543 million from the fourth quarter of 2022. Despite the negative cash generation, the net debt adjusted EBITDA ratio ended the period at 1.06x, which is a very comfortable level for a period of high working capital requirements.

Now in Slide 10, we have some historical data regarding the distribution of dividends and bonus approved recently. The shareholders' meeting held on April 27 approved the distribution of BRL 602 million, equivalent to 50% of net adjusted income and also, this includes interest on equity of BRL 71 million paid on January 13 and dividends of BRL 531 million, which will be paid on May 18.

Based on the closing numbers of 2022, dividend yield is 6.3% p.a. with dividends paid of totaling in the years, in the last 5 years, BRL 1.7 billion. The shareholders' meeting also approved bonus shares at the ratio of 10% corresponding to 1 new share for 10 common shares held on the base date of May 8, 2023.

On Slide 11, we have information about our share buyback program. In April 2023, we concluded a buyback of 4 million shares. We also approved the new buyback program for the acquisition of another 5 million shares. And also I now turn it over the floor to Pavinato who will talk about the outlook for the 2022, '23 crop year.

[Aurelio Pavinato, executive]

Let's move now to Slide 13, where we show you the status of the harvest and estimates for the 2022, '23 crop year. Soybean ended yet another crop year with healthy yields practically stable in relation to the previous crop year, which itself was a record. We achieved 3,908 kilos per hectare, in line with our initial forecast and 10.7% higher than the national average according to CONAB. Expectations for production potential of cotton crop, second crop are very positive. Thanks to consistent rainfall in recent weeks, which indicates excellent conditions for exceeding the guidance that we have announced.

Now we can go to Slide 15 to talk about the latest on ESG. In April, we released our integrated report, which is available for download from the Investor Relations website.

We can now go to Slide 16, where we present our new commitment to reduce greenhouse gas emissions. In this new version, we have made clear the commitment to make the company net zero carbon in net emissions in scopes 1 and 2 by 2030.

To achieve this goal, we have several ongoing projects such as: The end of the cycle of conversion of native areas, The soil conservation and green fertilization project, The ILP program, which is farming cattle raising integration. Digital and low-carbon agriculture project. Project for reforestation with native vegetation and Project for the use of energy from renewable sources.

This is our big dream, which is grounded on our commitments to our shareholders to positively -- positively impact future generations as the world leader in efficient agricultural business and respect for the planet.

Thank you very much, and now we will open for our Q&A.

[Rodrigo Gelain, executive]

[Operator Instructions] We have a question from Henrique Brustolin, BTG Pactual.

[Henrique Brustolin, analyst]

Pavinato, Ivo and Gelain. I have 2 points that I would like to discuss with you. Firstly, you have mentioned the condition of the of the crops of corn and cotton that are seem to be going well. But I would like to hear about potential revisions upwards of those numbers, considering the situations that you are witnessing right now?

And secondly, I think this was a recurrent topic in recent calls, but now that you have most of the inputs for next year, what can we think in terms of cost formation per hectare? There's this hectare, lower prices but more application and where do you think that the cost equation should look like?

[Aurelio Pavinato, executive]

Thank you very much, Henrique your questions. About yield, the month of April was very good with strong rainfall in all regions, Mato Grosso, Mato Grosso do Sul and Maranhao -- and also in Bahia. In May now, so far, it's looking good in the first 15 days, Maranhao and Mato Grosso. In Mato Grosso do Sul, there was no rain in May, but the soil is still very humid, which is good. So in summary, the yield for second corn cotton and corn is looking very favorable. That's why we maintain the forecast based on the project. But we believe actually that will exceed the expectations.

And especially in cotton, we planted on the right data and second corn -- second crop corn. We planted both in Maranhao and Mato Grosso -- so there was some delay because of excessive rain. But now with the rain in May, Maranhao, we will have high yield of corn, and we're still expecting a second round of rain, but in Mato Grosso do Sul. But in Mato Grosso, I think that perhaps we have a record corn crop in Mato Grosso, and we are pretty sure that we will not only meet, but we are going to exceed in terms of cotton, second crop corn. And also Mato Grosso do Sul, the cotton, the cotton corn is going to be -- both for cotton and corn is going to be a bumper harvest.

And we achieved fertilizer at low prices. We didn't buy everything because the market is still adjusting prices downwards, which is something that creates opportunity -- opportunities will buy cheaper than last month, for example, we are still negotiating crop protection inputs and also in the international scenario, crop protection products are in a downward trend. So we believe that in the next few weeks or next month, we will continue to make progress in the cost fixation for '23, '24. And we expect -- declining prices also because of the recomposition in -- of prices in fertilizers. So we are going to maintain costs in BRL for the crop year '23, '24.

In spite of the inflation that we've had this year, because in several of our lines, there were price increases because of inflation, but we expect that will maintain the costs for the '23, '24 crop year.

[Rodrigo Gelain, executive]

Our next question is from Daniel Sasson, Itaú BBA.

[Daniel Sasson, analyst]

In fact, my questions are more of a follow-up in relation to the previous question. You just said that you will start closing the hedge for the '23, '24 crop year, but it's a little slower than in the -- '23 crop year. And this -- in relation to this decision, since you were able to lock most of the costs you have just said, for example, fertilizers, et cetera, so don't you have now a good level of locked costs to start delivering. Can you tell us a little bit more about the rationale behind this decision?

And my second question is on the trading strategy of the leftover cotton from the from the previous crop because it's something that impacts the first quarter.

So what are the expectations you have in relation to this volume and how does this impact the strategy for trading cotton in the new crop?

[Aurelio Pavinato, executive]

Daniel, about hedging. Everything that we saw in recent months, well, the international markets are going down and premiums in Brazil, always at low levels or negative. It was negative in the beginning of the crop. So in fact, the market didn't price soybean and corn in a favorable way. In the case of cotton, the cotton market was -- was trading at very low levels in terms of pounds. So that's why we didn't make progress in the hedging for the '23, '24 crop. And we also -- well, we bought phosphorus way back because we were taking -- or making the most of the lowest part of the curve. And we bought it at 5.5%. This is when I bought it. And this, of course, was an opportunity, and we didn't make the decision of selling the commodity because it was not fairly priced in comparison of the international market. We have a hedging policy in the company. We follow it. Of course, we have some margin up to 10% of revenue. I can buy the input without selling the commodity. And this is what gives us flexibility to make advances.

Obviously, right now, we have to fix more input prices and commodities as well because the prices of inputs declined in the last 2 months. So we believe that now is the moment to establish this trading relationship, which is going to be in an adequate level in relation to '23/'24. At historical levels, it's not going to be a year of high -- very high levels as we saw in the last few years, but it still is going to be on historical levels.

In the case of cotton, we are feeling very optimistic that we will have a price recovery in the next month because the United States and Europe are now back buying, they're now producing textiles and China is now consuming more cotton again. And at the same time, we have a reduction of production in the United States and China. So for cotton, we believe that this is more of a -- a potentially blossoming market, that's why we believe we'll be able to fetch higher prices and also better trading conditions.

Now for the sales in the first quarter '23, we sold 100% of the '21/'22 crop year, This was a year in which we lost 20% of yield, and we also lost quality. It was a year in which everything went wrong because we didn't have enough rain in the crop development time. And then in July, we had also rain, which harm the yield of cotton. So it was lower quantity and also lower quality. But there is also a market for this. Cotton, they buy at a discount level in relation to New York and now the EBITDA margin in -- was low because it was higher priced cotton, and that was being sold at lower than it was marked to market during the harvest season in the previous year. So -- and besides that, since we had shortfalls from last year, we had also more to deliver.

So -- it was not soybean that drove it was the volume of cotton that we had to deliver this first quarter because I mean this quarter went very well. The results per ton sold was actually better than last year. But in cotton and corn in the first quarter, we had a lower or not as expressive result, but cotton still being sold. We still have to deliver -- sometimes that we'll deliver all the way until June or early July, which is when we'll settle the deliveries of cotton for the previous crop and we'll start with the new crop.

[Rodrigo Gelain, executive]

Our next question is from Denis Fonseca Pedro Fonseca , XP.

[Pedro Luis Silva Fonseca, analyst]

Pavinato,Ivo and Gelain. Two questions. Firstly, a follow-up in terms of volume. In your release, you say that investment in fertilizers in deluxe crop were down 20%. So I want to know if this is volume? And also, I want to understand what can we expect for the next crop in terms of increase of inputs with the breakdown between the catch-up, what you didn't invest in the previous crop and also expansion of planted area?

And then capital allocation, what is the company's strategy? I believe it's to be asset-light, but do you detect any opportunities for buying more land? How do you view this market? Are there exciting opportunities that we can expect in terms of expansion of land?

[Aurelio Pavinato, executive]

Thank you, Pedro. About the volume of input. We reduce the fertilizer use because -- and this was very positive because we were able to maintain our yield. But by using less inputs. So in soybean, for example, we had 4 farms with shortfalls and crop failure and 2 farms or rather 3 farms in Bahia, where there was a drought and also led to shortfalls. So in all, there were 5 farms with shortfalls of productivity, if it weren't for them, we would have at least 68 bags per hectare. And it was in soybean where we cut most the fertilizer and obviously, in cotton and corn, nitrogen is something we cannot reduce because it will affect yield.

And also potassium in corn and cotton. So that's why our expectation is that we'll have high corn and cotton yields this year. But since the prices for fertilizers dropped, the logic in our and -- think we want to continue gaining productivity to reach our target of 70 bags per hectare in the case of soybean. And in cotton, we want to reach 15 per cumin -- per corn from 7,000 kilos per hectare to 8,000 kilos per hectare. And with this, we will start applying more fertilizer in the current crop.

So of course, we are enjoying the decline in prices, a sharp decline in fertilizer prices this year. And the reduction is not going to be as expressive considering that we are adjusting quantities. And I would also like to comment on crop protection that we are doing a lot of new projects through digital agriculture and localized application, you have a map of your pest and diseases and then you can apply crop protection in a very localized way, and we also have a selective application where the nozzle only opens for spraying where the wheat is present with these 2 technologies in the current crop, because we have daily reports, and we have BRL 70 millions worth of savings in Crop Protection products that is 8% of the volume of the current crop year.

So this year, we'll probably have savings in inputs -- thanks to the use of those technologies and obviously, for the next crop year. And as this technology consolidates, we have a team that's very well prepared to increasingly use these tools -- we are projecting savings for next year. On the other hand, the planning for '23/'24 will have less use of inputs than we are currently using in relation to crop protection. And this is going to be very helpful not to increase costs -- production cost for '23/'24.

Capital allocation, land expansion, there are some strategic opportunities such as this part of the Paysandu farm, we are not expecting to do anything in that since next year. There's nothing on our radar. We are allocating capital in technology improvements, for example, expanding our machinery and doing other activities to increase our efficiencies and also we are also allocating capital with the payout policy of 50% of our dividends, and we are also buying back our stock because we have the day before we approved around 7 million shares.

And this is, of course, an important way of allocating capital buying our own stock back. And obviously, we have a lot of capital to invest in the expansion. So there are 2 ways. We have either mature areas or pastures. We're not going to use native land anymore. So we're going to use -- or native forest areas anymore. So we're going to use either mature areas or former pastures to drive the expansion. The expansion is never linear in relation to our land and in this scenario, the commodity scenario is being traded at lower prices also have a downside because margins are squeezed, but at the same time, opportunities emerge. So this is the upside. So we want to maintain a low leverage and with this, we will be prepared to take the best opportunities for growth in the next years in the near future.

[Rodrigo Gelain, executive]

Our next question is from Matheus Enfeldt, UBS.

[Matheus Enfeldt, analyst]

Ivo, Pavinato and Gelain. Okay. Speaking of growth, what we see is the compensation of margins, resumption of historical levels. And for 2023 -- '23, '24, does this impact your expectations to grow between 30,000 and 35,000 hectares per year. And also considering logistics, we see that there are high discounts in Brazil because of logistics. There are bottlenecks in shipping, the production and other things that won't be resolved for next year. So what are the negotiations you're involved in for '23 and '24? Have you been observing higher discounts for Chicago than historical levels? And what's the impact of that in your commercial strategy and also in your plans for new investments?

[Ivo Brum, executive]

Thank you, Matheus, for this question. Well, growth and offsetting margins. We have several projects for next year. We are conducting feasibility studies. But with interest rates at this level, it makes it -- almost impossible to have projects go through. We have projects, of course, sometimes there is a commonality of interest between the owners of the land and us. But with the interest rates where they are, it's just not possible. So we are growing and the margins, in spite of the price pressure and cost pressure, I don't see much of a difference in margin because there is both reduction of prices, but also reduction of cost. And the company -- the company didn't grow when margins were high. It grew when margins were low. So for next year, we cannot really foresee low margins, but we have several projects on the table under evaluation. And with the high interest rate, if it one side, it's difficult to -- growth projects, on the other hand, opportunities appear because the financial markets are now -- aren't very sound.

So we believe that in the second half of the year, there will be more opportunities maybe for -- not for this crop year, but maybe for the next one. 30,000, 35,000 hectares, it's 1 farm a year, which is very feasible considering our current leverage.

[Aurelio Pavinato, executive]

Okay, Pavinato now. Okay, about logistics. What happened in soybean this year that will occur with corn, Brazilian producers. They didn't sell forward or they sold very little forward. And then at the time of harvest, there was oversupply to the market. And as such, the premiums of soybean, which are around $0.50 positive and in the second half, they reached $1.5. And at the end of the harvest, we reached negative $2 per bushel. We are recovering this, and it's now at $0.70, but still negative. So we are recouping soybean harvests over -- what could not be stored was sold, and that's why there was this oversupply. With corn, we'll probably see a similar situation because not much was sold forward, and we're going to have a very good second corn -- second crop corn, and this will create also a downward pressure on prices.

When we think of the new crop year '23, '24, and considering the climate forecast with El Nino, we'll get rain in the South of Brazil and in Argentina. So it's going to be normal rainfall and according to the numbers shown by the USDA, it's going to be -- it's going to be an year with more supply than demand and of course, there will be no fighting or struggling for the product. So prices will -- or the commodity will be traded at lower prices.

So we are in a scenario where the premiums for '23,'24 are under pressure. So as for logistics, well, we have our strategy. We have -- we have storage for our soybean at least 50% after harvest. And we also know that 30% is something that we can store and we also can harvest corn at the same time. So we deliver half of the corn during the harvest and the other half is stored. So we have no problems with storage considering that we sell forward and we also ship during the harvest and there's always some volume left over to be sold during the off-season. But in the Brazilian market, yes, there is a lot of pressure, and this is creating pressure as well.

[Rodrigo Gelain, executive]

Our next question is from Julia Rizzo, Morgan Stanley.

[Julia Rizzo, analyst]

Okay. I would like to follow up on the last question about logistics. I think -- this has been a little dramatic for soybean in Mato Grosso and it could be also for corn. I understand -- you can store...

[Aurelio Pavinato, executive]

let me just clarify.

[Julia Rizzo, analyst]

You can store 70% of your soybean?

[Aurelio Pavinato, executive]

No. Well, we sold forward 75% of soybean, we have only 25% in storage.

So when you say that you sold, yes, everything is going to be shipped before we harvest corn that we'll start harvesting next month. So before we start, 75% of our soybean will be shipped. And with this, we can have the 25% -- soybean simultaneously with the corn.

So with corn, we are sold forward 61%, and it's going to be shipped during the harvest and whatever is left, of course, is going to be stored to be sold at the right time. So you can keep 25% of your soybean up to November or December, September, October, this is where we have the best premiums in Brazil.

[Julia Rizzo, analyst]

And you can -- and you can also store all of your corn that's coming with high yield and high productivity?

[Aurelio Pavinato, executive]

Yes, I don't have to sell it cheap in the market.

[Julia Rizzo, analyst]

Okay. Okay. I understand. So in terms of investment of silos and warehouses, do you believe that this could be also a strategic asset for you because considering the conditions with El Nino and with the expansion of yields and cultivated areas, maybe in the next few years, this will be, I don't know an issue for producers? Do you think that this is an investment for you? I mean increasing your storage.

[Aurelio Pavinato, executive]

I think that we're very well prepared. We have some specific needs to increase capacity in some farms, and there are -- we have 2 farms in which we use third-party storage or external silos. But as for the other farms, they are very well structured to support our storage needs.

[Julia Rizzo, analyst]

Okay. Just 2 more questions, if I may, especially focusing on corn. With decrease of corn prices in Mato Grosso, do you believe that farmers might invest less in the next crop year, considering the current -- the current prices. Looking ahead, I mean, because there was a very sharp decline in prices, so maybe for farmers I'm not talking about SLC in fact, but rather the market at large. Do you think that there could be a decrease intention to plant?

[Aurelio Pavinato, executive]

Yes. If prices continue at the level they are in right now, farmers will have to think twice both in terms of the investment in technology and also considering the planted area, they might think maybe it's not such a good option. So we believe there will be adjustments in the market in the next -- in the near future and maybe even next year. as we recover the premiums because this is the variable that's really putting pressure on the market, the negative premiums. So thinking of the next years as we close the crop in August, I think that prices will bounce back and then prices will bounce back to ideal prices higher than where they are now. And this, of course, will motivate farmers to maintain the planted area. With corn, well historically, Brazil has always planted corn even with tight margins because there is second crop. And the decision to plant corn is based on contribution margin rather than profitability. Now investment in machinery with corn trading at tighter margins than the farmers will invest not as much in machinery.

[Julia Rizzo, analyst]

And what about El Nino, it's very favorable for the South, but not so good for the Northeast. Just remind me, please -- the projection -- the percentage that's not favored by El Nino in your portfolio. What are the risk areas in our portfolio?

[Aurelio Pavinato, executive]

We analyzed our historical data for the last 20 years to see what was yield like during the different climate events of El Nino La Nina. And neutral years for us are less favorable than La Nina and El Nino -- El Nino years are years in which we get less rain, especially in Bahia. In the Northeast as a whole. But in Maranhão, because of our -- histories is an area with less rain but enough rain because sometimes getting enough rain is good enough, right? Sometimes, excessive rain is not good in Mato Grosso. This Year we didn't have much rain in January and February. It was below historical levels. And this was good for second crop cotton and corn. And then in March and April, we got enough rain on historical levels. So that's why today in Mato Grosso, we have -- we had this more balanced climate pattern that were very beneficial for our crops. So we are expecting normal crops for an El Nino year.

In Mato Grosso, in El Nino years, we have a slightly high output of soybean. In recent years, although the -- we had record-breaking harvest in Mato Grosso, we -- I think there's always some potential left on the table. When we talk about an average 63 bags per hectare, I think the potential is 65, 68 bags. So we believe that in an El Nino year with that's not drenched and rain in Mato Grosso is going to favor our productivity. So when we look at the whole portfolio, we expect to maintain our productivity levels even in a El Nino year. And in the south, Argentina will produce more. Brazil will produce more.

[Julia Rizzo, analyst]

What is the -- your area in Bahia that could be affected?

[Aurelio Pavinato, executive]

I think it represents 20% of our cultivated land. 25% -- depending on the crop. But even in Bahia the worst tiers of El Nino, in 2016, we suffered in Bahia because we had a -- we had many immature areas, first year, second year now. This is no longer the case. Our areas are mature, and they can withstand climate events with much more resilience. So we believe that we'll maintain high productivity in Bahia, just like this year, it was a La Nina year in Bahia, we had some areas with a lot of rain in which we were breaking productivity records and in the same region of Bahia, we had farms producing 50 -- some were producing 84 bags and some were producing 50 because of the different climate events. So overall, we expect to maintain the yield for the next crop year, even if it's an El Nino year. And this is backed up by our historical data. So we're seeing this with comfort.

[Rodrigo Gelain, executive]

Our next question is from Joaquin [indiscernible].

[Unknown Analyst]

Just 2 quick questions just to close the video conference. Ivo, I'm not sure if it was you or somebody else who said that you want to keep your leverage low. Do you have a specific target in mind? And secondly, can you give us an update about your seed business where you want to get and how?

[Aurelio Pavinato, executive]

Well, about leverage, our target is to be below 2x debt in the debt over EBITDA ratio. So we have to be more selective when it's above 2, we have to be more selective in relation to our targets. And when we're at 1.06x, it's very comfortable, not for me yes, no. So we're feeling very confident. We have BRL 9 billion in land that was not given in guarantee for any operations. So we're all feeling very comfortable. The banks are comfortable. Our interest rate, if you compare it first to fourth quarter, there was a reduction. Why? Because the company is seen as a safe haven, and we can get funding at a lower cost. So that's why I underscore this idea.

As for the second question about seat business -- well, seeds. This is a project that we started 5 years ago. It's making progress. It's adding value to the company. This year, our target is to -- well, 1.2 million bags of seeds, soybean seeds. We always make more because we always want to keep some reserves and 122,000 bags of cottons, and we have just opened our business in Mato Grosso and with this, we can reach 2 million bags of soybean seeds next year for cotton. This is different. All you have to do is to process it because there's a -- as it's a high added value, it's -- so our seed business is going very well. We expect to continue growing to reach the levels of high -- big players in the market exploring the synergies between the 2 businesses and also the synergies in technologies, we always want to be taking the lead, analyzing quality because this also creates a positive impact. So this is how we view the seed business. We were able to make progress in this project with not much of an investment because all of our operations are outsourced. Now services are outsourced. This adds value to our results, and we have a very interesting return on invested capital as well. So besides cotton, soybean and corn, we have the fourth product, which is seeds. And all of this adds to the assets we currently have in our operations.

[Rodrigo Gelain, executive]

If there are no further questions, this video conference on the first quarter of 2023 is now closed. Our Investor Relations department is available to answer all of your questions and clarify any points. Thank you very much. We wish you all a great day. Thank you.

[Statements in English on this transcript were

spoken by an interpreter present on the live call.]