SLC Agricola SA

BOVESPA:SLCE3

Earnings Call Transcript 2020-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 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 slideshow may be accessed through SLC Agrícola's website at www.slcagricola.com.br in Investor Relations section by clicking on the banner Webcast 3Q '20. The following presentation is also available to download on the webcast platform. The following information is available in thousands of Brazilian reais and in IFRS, except when otherwise indicated.

Before proceeding, let me mention that forward-looking statements are based on 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. You may proceed.

[Aurelio Pavinato, executive]

Hello. Thank you for participating in SLC Agrícola's earnings conference call for the third quarter of 2020. Let's go to Slide 3, where I will make brief comments on the recent price movement for our main products.

In general, price for cotton, soy and corn traded upwards over the last few months, which was intensified in the case of Brazil due to the continuous depreciation of the Brazilian real against the dollar. For the cotton market in specific, the quarter was marked by successive negative revisions in production estimates for countries on the Northern Hemisphere due to unfavorable weather. To that, a scenario of consumption recovery was added. These factors provide the fundamentals for our price recovery, which are currently around the $0.70 per pound level, given that the estimate for surplus between supply and demand was revised downward again and at the moment points out to only 1.9 million bales, according to USDA.

Soybean quotations for the spot contract in Chicago and local price in Brazil has increased along the third quarter of the year. For the current cycle, the '20/'21 crop year, the supply-and-demand scenario will present the second consecutive year of deficit at 2 million tons after a deficit of 18 million tons in the previous year. The recovery in Chinese demand has been a key supporting factor for prices, especially after the previous cycle, which was marked by the trade dispute between China and the U.S. and also by the African Swine Fever, which contribute to reduced international prices of the commodity in 2019. In the local market, the maintenance of premium and the Brazilian real depreciation enabled record prices and more recently allowed for quotations above BRL 150 per bag based on CEPEA data for Paranaguá port.

Corn price in Chicago increased as well during the quarter. In this case, mainly due to the reduction in planted area in the U.S., which is due to the climate. In this case, they reflect of storms and dry periods. With that, the final area estimate for the cereal should be 6% lower if compared to the first estimate of the USDA. In Brazil, the market demonstrated strong demand during the year via the protein market and also via the export program. Globally, however, the supply and demand scenario is expected to be stable, according to the latest figures from USDA, with a small surplus of 2.9 million tons.

We can now move on to Slide 5, where we will discuss our initial estimate for the 2020/'21 crop year. The planted area forecast for the new crop year is of 471,700 hectares, a new record and posting growth of 5.2% over '19/'20 crop year. The late onset of rains for the Midwest region this year caused delayed soybean planting and consequently, a reduction in the planting window for cotton second crop. With that, part of our second crop area initially planned for cotton was transferred to corn, which has a wider planting window.

On Slide 6, we demonstrate the results of the independent land appraisal for 2020 conducted with Deloitte. In September, the new appraisal was concluded for SLC Agrícola's land portfolio, which present a total value of almost BRL 4 billion, an increase of 4.62% in relation to 2019. The average value of the arable hectare is currently at BRL 19,300 per hectare. As expected, the period was marked by the beginning of a land price recovery in the country.

I will now hand the call over to Ivo Brum, CFO and IR Officer, for his comments on the financial results for the period.

[Ivo Brum, executive]

Hello, everyone. You can move now over to Slide 8, where I will comment on the income statement.

The net revenue increased 15% in the 9-month period against 2019. And adjusted EBITDA for the year up to September was of BRL 562.3 million with margin of 28%. The combination of the weaker real along 2020 and the commodity price recovery over the last few months contributes to achievement of the net profit of BRL 316.8 million, 40% higher than 2019.

On Slide 9, we highlight the positive free cash flow generation in the quarter at BRL 315.1 million, reflecting the improvement in the cash flow which is characteristic of the second semester of the year.

With that, on Slide 10, we present the net debt position for the company, which closed third quarter at BRL 1.2 billion, a drop of BRL 234 million over the second quarter. Reflecting the positive free cash flow, net debt to EBITDA ratio also dropped to 1.4x. You see on the leverage side, we highlight that the Board of Directors approved in meeting held on the October 5 the issuance of the agribusiness recoverable certificates in the amount of BRL 400 million with an upper limit of BRL 480 million, having as coordinators the banks Bradesco, Itaú and Santander. Additionally, we raised funds of BRL 100 million on October 29 from Banco Santander in the first operation with the green bond seal carried out by the company, enabling a differentiated loan rate due to our practice in the environmental management and social responsibility.

To close this section on the Slide 11, present a few details on the payment of interest on own capital. Considering the cash generation in the period as well as the taxable profit, management approved on the previous Friday the payment of BRL 37.1 million as interest on own capital to its shareholders. Payment will be made on December 16. We have a cutoff date of November 13. The amount corresponding to the payment of interest on equity, on capital will be imputed in the calculation of the mandatory dividend for the fiscal year 2020 as provided for in the company's bylaw.

I will now hand it back over to Pavinato for his final remarks.

[Aurelio Pavinato, executive]

Thank you, Ivo.

Let's move on to Slide 13, where we show the updated hedge position. The significant appreciation in prices for all of our main crops allowed for strong advance in our hedge position for '19/'20, '20/'21 and even '21/'22 crop years given that input purchases have started for the next crop. When taken into account costs, dollar prices and also the current FX level, we expect the good profitability level to be maintained into '20/'21 crop year. And we also foresee an excellent outlook for the '21/'22 crop year.

And the final words on Slide 14, I'd like to acknowledge the creation of SLC Ventures, upon the revision of the strategic planning for the year with our directors and managers, which was carried out in digital format, among the other deliberations, a plan for investments in new agribusiness with a digital focus was outlined and approved with the Board in connection with the new technological trends in course in the sector. The initiative gives a new mandate to our innovation strategy with a view towards renewing the business in the long term and complement the various efforts already underway that aim at strengthening the current business. The vehicle for carrying out the investment will be SLC Ventures.

Thank you. And now we will be open to the call for a Q&A.

[Operator]

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