SLC Agricola SA

BOVESPA:SLCE3

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to SLC Agrícola Third Quarter of 2018 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 this event is being recorded. [Operator Instructions]

Also, today's live webcast, both audio and slide show, may be accessed through SLC Agrícola website at www.slcagricola.com.br in the Investor Relations section by clicking on the banner Webcast 3Q '18. The following presentation is also available to download on the webcast platform. The following information is available in thousand 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 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 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'll turn the conference over to Mr. Aurelio Pavinato, CEO. Mr. Pavinato, you may proceed.

[Aurelio Pavinato, executive]

Good morning, and thank you for participating in SLC Agrícola's Earnings Conference Call for the Third Quarter of 2018.

Let's go to Slide 3, please, which has a summary of our yields in the '17/'18 crop year. Goals -- harvesting was complete in the year's third quarter. We updated our estimate for cotton lint yield to 1,810 kilograms per hectare, up 1.3% from the figure presented on second quarter. The figure was also 8.3% above our initial forecast and 6% above the Brazilian average.

For soybean, which harvesting was completed in the second quarter, the average yield was 3,739 kilograms per hectare, 10.2% above the Brazilian average and 13.9% above the '16/'17 crop year. This set up -- straight year of yields well above the trend line is with current strategy of focusing on yield gains and on expanding our advance in relation to the average national yields. The main natural support in these results were improvement in machinery dimensionings per farm, growth focus on developed areas with a consequent increase in the average maturity of our fields and investment in precision agriculture to ensure greater crop uniformity.

Let's turn to Slide 5, where we will begin our comments on the recent price variation in our main products and short-term price outlook. Cotton prices are basically at the same level as the start of the year, given the recent declining, which was due to the uncertainties caused by the trade war between United States and China.

In short term, however, the supply-demand balance for cotton remains favorable, with consumption following a solid upward path in recent years to new records and production growing more slowly, which points to yet another year of a drawdown in global stocks.

The USDA report of November 8 estimate world cotton consumption of 25.9 million tons and world cotton production -- 25.9 million tons and consumption 27.6 million tons. In the United States, the world's large cotton exporter, USDA data points to production of 4 million tons, 12% lower than last crop year, mainly due to the severe drought in Texas, the country's main cotton-producing state. On top of that, hurricanes Florence and Michael, not only caused additional losses in the volume produced, estimate at up to 290,000 tons (sic) [ 220,000 tons ], but also affected the quality of the fiber produced.

Since Brazilian cotton is of high quality, on par with that of U.S. and Australia, a production shortfall in the United States provides space for Brazil to expand each share of global trade.

In the case of soybean, price chart show -- you can see on Slide 6, there was a reduction in prices over the year in Chicago, basically due to the confirmation by China of 25% duty on soybean imports from the United States, which is one of the developments of the trade war cited earlier.

Soybean prices were further pressured by the good conditions at the U.S. crop in '18/'19, for which harvest is 83% concluded according to USDA. Despite the lower price in Chicago, the prices paid in Brazilian real to local producers remain above the level of the year ago, given the Brazilian real depreciation during the year and the premiums in U.S. dollar, the so-called basis, that is currently in the Brazilian market, as shown in the chart. Note that price currently [ practiced in ] Chicago are not attractive to U.S. producers, which have led the Trump administration to announce a temporary financial aid package for farmers until trade discussion with China are not concluded.

Corn prices, which you can see on Slide 7, are also mid-levels at the start of the year despite the volatility during the periods. In the global market, a second year of production deficits should support prices in the short and medium term. Despite the strong production in the United States in the '18/'19 crop year, shortfalls in second corn in Brazil and at the corn crop in Argentina reduced supply during the year. The trade war between the United States and China had little impact on international corn prices since China is not a relevant corn importer. In domestic market, prices are [ trade ] at the premium on Chicago prices, as you can see in the chart, being the shortfall in the second crop, the main factor of the support. According to CONAB, corn production was 17% lower than in '16/'17 crop year in Brazil.

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

[Ivo Brum, executive]

Good morning, everyone. Let's go to Slide 9, which shows some highlights from our income statement for the period. Improvement on the operational front supported unprecedented financial results for the 9-month period, with adjusted EBITDA of BRL 397 million, up 26% year-over-year and net income of BRL 373 million, up 60% year-over-year.

On the quarterly comparison, EBITDA and net income were lower. However, in our business, quarterly analysis must take into account the context. The lower EBITDA is explained by the fact that the higher percentage of the soybean from [ different crop ] was invoiced over the first semester is compared to 2017 and also by delays in the shipments, which were postponed to the fourth quarter, given the inconvenience established over the minimum freight rates. So our expectation for the fourth quarter of 2018 is to invoice approximately an order of 85,000 tons of cotton, 166,000 tons of soybean and 130,000 tons of corn.

In the case of net income, the reduction between the third quarter of this year and the same quarter last year is to the dynamics of the appropriation of Biological Assets, since the distribution of the net income amount of quarters was different in 2018 than in 2017. In 2018, a higher shares of the net profit projected for the year was recognized in the first half, with a lower share left to be recognized in the third and fourth quarters.

Net debt, as the latest material on this Slide 10, increased during the year, but net debt to EBITDA ratio remained at a very comfortable level of 1.45x. The higher debt balance is explained by the sharp expansion in the planted area for the new crop year, mainly due to the incorporation of a new production unit, Pantanal Farm, and by the significant expansion in the cotton planted area, which pressured working capital requirements.

I'll now pass the call back over to Pavinato, who will comment on the outlook for the next fall.

[Aurelio Pavinato, executive]

Thank you, Ivo. Let's move to Slide 12, which has an infograph with the summary of the production cycle. We are finalizing the planting of soybean, which are already 80% completed as of November 9 and are about to start planting cotton. To-date, the crops are present excellent aspect, given the excellent execution of the planting operations by our teams, combined with good rainfall distribution and intensity in all regions, as you can see on Slides 13, 14, 15 and 16.

Let's go after to Slide 17, which shows our update plus the area forecasted for the '18/'19 crop year. As you can see due to the excellent conditions for planting soybean, we expand the initially projected planted area from 455,000 to 457,000 hectares, which is 13% larger than in the previous crop year. Also note that in line with another pillar of our current strategy, which is growing our operations in higher value crops, we are expanding our cotton planted area by 28%. And as part of the continued effort to optimize our capitalization, the company's total second-crop planted area is expanding 18.7%.

On to Slide 18, you can see details of the cost per hectare budget for the '18/'19 crop year. Mainly due to the real depreciation over the year, the average cost increase in real is estimated at 19.4% on the previous crop year, considering a budget effect rate of [ 3.8 ] for inputs costs. Note, however, that this effect will be offset provisionally by the increasing revenues given the company's hedging strategy, which is at precisely this objective. Therefore, there should be no downward pressure on margins, as you can see on Slide 19, which presents the company's current value position for '18 and '19 showing good pricing levels.

Lastly, given this combination of factors, mainly the expansion in planted area, the alignment of cost to the revenues and good yields expectation for '18/'19 crop year are very positive midyear to expect high profitability for the coming crop year. Thank you.

And now let's open the call for questions.

[Operator]

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