SLC Agricola SA

BOVESPA:SLCE3

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen, and thank you for waiting. At this time, I would like to welcome everyone to SLC Agricola to the second quarter of 2020 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 slide show, may be accessed through the SLC Agricola website at www.slcagricola.com.br, in the Investor Relations section by clicking the banner of webcast 2Q '20. 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 Agricola management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to the future events and therefore depend on circumstance 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 that 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.

[Aurelio Pavinato, executive]

Good morning. Thank you for participating at SLC Agricola's earnings conference call for the second quarter of 2020.

Let's go to Slide 3, please, where we will comment on our operating performance. This is the end of soybean harvest. The final yield was 3,900 kilograms per hectare or 8.1% higher than our initial estimate and 19.2% higher than the national average. Note that for the third straight year, we set a new soybean yield record, which is in line with our current strategy to focus on maximizing operating efficiency.

For cotton, with 55% of the area harvested, the estimated yield considering the waiting between the cotton's first and second crop, is 1,761 kilograms per hectare, down 2.5% from the initial forecast, which is explained by the low precipitation. Lastly, for the corn second crop, with 85% of the area harvested, the estimate yield is slightly below forecast at 7,220 kilograms per hectare due to below average precipitation in the state of Mato Grosso and Mato Grosso do Sul during the flowering and seed-filling phases. Even so, the result is 32% (sic) [ 34% ] above the national average for corn second crop published by CONAB already using the data released yesterday by the institution.

Let's go now to Slide 5, where I will comment briefly on the international price of our main products. The second quarter of 2020 registered a recovered -- recovery in international cotton prices, given that the supply side responded to lower prices by reducing the planted area in a north hemisphere. On the demand side, the beginning of a recovery already can be observed as economies begin to resume retail activities, albeit slowly.

In Brazil, the effect from the lower prices in dollar was significantly mitigated by the weaker Brazilian real against the dollar. In addition, taking advantage of the expansion in planted area in the '18/'19 crop year, which was harvested in the middle of 2019 and the stability in planted area in the '19/'20 crop year currently being harvested, the AMIA estimated that in 2020, Brazil will export 1.9 million tons, in line with the growth trend observed in the last 4 years. Soybean spot prices on the Chicago Board of Trade and the prices paid for the grain based on the Parnagua CEPEA reference also staged recoveries over recent months. The maintenance of the premiums paid and the local currency depreciation enabled soybean price to reach levels above those in same period of last year and more recently, results in costs of over BRL 115 per bag according to CEPEA data from -- for Parnagua.

In a quarter marked by risk aversion due to the economic slowdown, price for the soy contracts in Chicago showed resilience in relation to the Bloomberg Commodity Index, which registered a decline of approximately 15% in 2020.

The resumption of imports by China, driven by expectation of a recovery in domestic demand in that country, has been the main factor sustaining prices, especially as the past cycle marked by the U.S.-China trade war and the African swine fever, which contributes to the scenario of depressed prices for the commodity in international markets.

For corn, international prices currently are down from the same period of last year, reflecting to a large extent the scenario of lower consumption in the United States, which is basically due to the closure of corn ethanol production plant in the country and the resulting increase in estimates and in stocks. In Brazil, however, the market was strong in the first half of the year due to the demand from the animal protein industry and from export markets, supporting to date a continuation of high premiums over prices in Chicago.

I will now pass the call over to my colleague, Ivo Brum, our CFO and IRO, who will go over our financial results in the period.

[Ivo Brum, executive]

Good morning, everyone. Let's go to Slide 7, which presents some highlights from our income statement. Net revenue grew by 36% year-over-year in the second quarter mainly due to the higher volume of soybean invoiced. In the first half of this year, net revenue advanced to 15.8% due to 11% increase in the invoiced volume, combined with the higher invoiced unit price for all crops in the second quarter. Adjusted EBITDA was BRL 145 million, advancing 31% on the second quarter last year. Adjusted EBITDA margin ended the period at 25.7%. The variation in the adjusted EBITDA reflected the growth of BRL 35 million in gross income, excluding variation in the Biological Assets. Analyzing the contribution by crop, gross income growth in the quarter was driven by soybean crop, which registered growth in the invoiced volume aided by margin expansion. This higher gross income was partially offset by increase in SG&A.

In the first half, adjusted EBITDA was BRL 327.7 million, 3.3% higher than the prior year period, with adjusted EBITDA margin of 27.4%. Net income in the second quarter was BRL 196.1 million, decreasing 7.5% year-over-year, mainly due to the accounting dynamics of Biological Assets, especially soybean.

In 2020, most of the net income attributed to crop was recognized in the first quarter when compared to 2019. This is confirmed by an analysis of the net income in the year-to-date, which grew by 9% on the year on the prior year period to BRL 352.5 million.

As we have been emphasizing in our communication materials, the accounting dynamic of the Biological Assets can shift income recognition between quarters, which means that the analysis of the year-to-date results better reflect the expectation of the given crop year.

To conclude, Slide 8 present our debt position. Adjusted net debt ended the second quarter of 2020 at BRL 1.4 billion, representing an increase of BRL 487 million from the fourth quarter of last year. Net debt was affected mainly by the higher working capital needs, which in turn were influenced by the higher payments of agriculture inputs for the '19/'20 crop year. Note that this increase in debt is expected for this period of the year, given the financial cycle of the business, given that we are now harvesting of cotton and corn, which will be invoiced in the second half of the year, generating higher operational cash flow.

Gross debt also increased in the period, reflecting the conservative strategy to maintain a comfortable cash position to protect the company from any further economic financial stress caused by pandemic. With the new interest rate scenario, the company raised mainly long-term debt index to the CDI rate, which leads to a reduction in the cost of the debt with the annual average rate falling from 5% in the fourth quarter 2019 to 3.2% in the first half of this year.

Lastly, I wish to highlight that Annual Shareholders' Meeting held virtually on July 30, approved a new dividend distribution of BRL 7.3.7 million (sic) [ BRL 73.7 million ] which was paid yesterday, bringing total dividend paid in the year to BRL 147.5 million.

I'll now pass the call back to Pavinato for his outlook for the rest of crop year and the next crop year.

[Aurelio Pavinato, executive]

Thank you, Ivo. Let's go to Slide 10, which shows the updated hedge position for the '19/'20 and 2021 crop years, already converted into Brazilian real. We made great progress in selling production from the crop year, obtaining prices above the current market and above last crop year based on the amount in local currency. We also concluded our purchase of fertilizers and chemicals for the 2021 crop year, with the negotiations leading to significantly lower prices in dollars compared to last crop year. Considering the current scenario of our dollar costs and prices, as well as the level of the FX rate, our expectation is for the good level of profitability to be maintained for 2020-21.

Thank you. We'll be available for questions.

[Operator]

[Operator Instructions] Our first question is from Guilherme Palhares from Bank of America.

[Guilherme Palhares, analyst]

Pavinato, Ivo, hope you're all safe. I have 2 questions on my side. The first one is regarding the mix of crops for the next season, given the outlook that you will have already designed for us. How are you thinking about the planning for the production for the next crop?

And also, given that we saw this huge forecast having expectations lowered, what are your thoughts going forward during this crop? I know that the company is already harvesting a large share of its crops, but do you see any downside risks to you as well?

And lastly, a third question here is regarding cost of the current season. When comparing to your first budget last year, how costs are behaving during this quarter?

[Aurelio Pavinato, executive]

About the mix of crops, we are going to announce, in October, our planted area for next crop year. But the trend Guilherme is to maintain the share of crops because the soybean profitability is in a good level. The corn has been a profitable crop better than the year before. And so we're going to plant as much as possible corn. And the cotton prices recovered. And when we see the contribution margin of the cotton compared to soybean, normally, it has been higher than soybean. So consider this information, we can say the trend is not to change so much the share of crops.

About the cost production, as we mentioned the reduction on prices of fertilizer and chemicals is going to help us a lot to reduce our production cost in dollar terms considering that the real depreciation and all of our real basis cost will be much lower in dollar terms. So our forecast that next crop year, we are going to have a strong reduction on cost in dollar terms. And as you can see, with the pricing level in the market, it can give us probably an opportunity to keep good margins over the years.

I don't know if I answered all your questions.

[Guilherme Palhares, analyst]

That's very clear, Pavinato. And if I may ask about the dollar that you marked your cost during this season, what is the average dollar that you had during this season? And when looking at the next one, if taking the current FX could be a good proxy? So we can estimate cost growth for the next season.

[Aurelio Pavinato, executive]

I would like Ivo to answer this hedge positioning, please.

[Ivo Brum, executive]

Okay, Pavinato. So thank you, Guilherme. So as you know, you have a hedge policy. So accordingly, you are paying the suppliers, we start to sell the index for future sales. So less the crop, our dollar basis for the cost was around BRL 4 per $1. In the end of the crop, we will have around BRL 4.20 because of capital devaluation of real in this process. On the next crop, our invoice nowadays is around BRL 5.20 per $1. So we have a few payments, I can say, of the suppliers. So when you have the position, you sell the fixed dollar. So -- but our idea is to have something around BRL 5.20 as a base for the next budget. But you have the definition clearly in the next quarter because we have a meeting with our Board to define our budget.

[Operator]

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