SLC Agricola SA

BOVESPA:SLCE3

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, ladies and gentlemen, and thank you for waiting. At this time, we would like to welcome everyone to SLC AgrÃcola the Third 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 slide show, may be accessed through SLC AgrÃcola website at ir.slcagricola.com.br, in the Investor Relations sections by clicking on the banner webcast 3Q '21. The following presentation is also available to download on the webcast platform. The following information is available in thousand of Brazilian reais and in IR -- sorry, IFRS, except when otherwise indicated.

Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of SLC AgrÃcola 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]

Good morning. We would like to thank you all for participating in the conference call to announce the results of the third quarter of 2021 for SLC AgrÃcola. This quarter was marked by the beginning of the control of the business management of Terra Santa Agro S.A. On July 1 of the year with the completion of the merger of Terra Santa Agro S.A. shares 2,516,000 new shares from SLC AgrÃcola common shares were issued in favor of Terra Santa shareholders.

On October 29, according to the material fact disclosed on that date, we finalized the final price adjustment agreement between SLC AgrÃcola and Terra Santa Propriedades AgrÃcolas, resulting in a payment in favor of SLC AgrÃcola of BRL 20 million. This value is broken down as follow: BRL 12 million through the payment of finance advisory contracts, obligation contracts by Terra Santa with banking entities; and BRL 8 million paid in Brazilian currency.

As we can see on Slide 3, the consideration transferred was BRL 192.8 million, comprising the value -- the fair value of the shares issued. The cash consideration arising from the right to use the lease, the change in assets and liabilities and finally, at the present value of the tax credits. The various goodwill generated in this transaction was BRL 47.3 million, arising from the ratio between the consideration transferred by SLC AgrÃcola versus the value of assets and liabilities acquired.

On Slide 4, we also showed that some assets and liabilities were not assumed by SLC AgrÃcola. Thus, surplus assets and liabilities provided for in the association agreement and other covenants will be carried out by the company and upon settlement will be received or collected from the former shareholders with burden or bonus on the part of the company.

The amount of contingent assets and liability resulted in a net contingent liability of BRL 53.8 million. The integration of the processes, systems and people is taking place gradually and in a very positive way, taking advantage of the best practice of both companies. The best combination is in line with our current strategy, pursuing the achievement of an asset-light growth pillar.

We can move on to Slide 6 where I will now comment on the market outlook. The third quarter of 2021 was marked by an increase in cotton prices on the New York Stock Exchange spot contracts, where the price of fiber surpassed the $1.00 per pound in market. The reduction planted area in the American territory for the '20/'21 -- '21/'22 crop cycle and in Brazil in '20/'21 crop year were the main reasons for the variation in prices from the point of view of supply.

Regarding the demand scenario, the growth of imports by China stands out where it is estimated that in '20/'21 cycle, the imported volume reached approximately 13 million bales, the highest in the last 6 years. For '21/'22, the volume is also higher than the average of last 6 years with a volume of approximately 10.5 million bales.

The increase in global demand for fiber and scenario for reduced production in the main exporting countries are facts that have contributed to the global balance between supply and demand closing '21/'22 in a deficit condition of approximately 2.3 million bales according to USDA estimates.

In soybean, during the third quarter of this year, the prices observed in Chicago added to the premiums in Brazil, and the exchange rate depreciation allowed price in reais to reach levels higher than those observed in the past cycle. And more recently, results in price above BRL 170 per bag according to CEPEA survey at the Paranaguá base, whose equivalent quotation would be $13.5 per bushel. The sales volume of North America soybean has been an important support factor for the oilseed prices on the Chicago Stock Exchange. Since the volume committed to China, the general total shows the normalization of sales between United States and the Asian country.

At the global level, for the current '21/'22 cycle, the relationship between supply and demand should show a surplus of approximately 6 million tons following the positive balance of 3.2 million tons in '20/'21 and negative of 18.5 million tons in '19/'20. However, the confirmation of La Niña will bring important climate situations to the southern region of South America, especially in Argentina, which could lead to price instability.

Corn prices in the CBOT spot contract and in the Brazilian domestic market continued to show price at levels above the historical average of recent years, maintaining part of the upward trajectory starts in middle '20. Throughout the third quarter of '21, the scenario of firm demand measured mainly by U.S. corn sales to China continues to support grain prices in Chicago. In the Brazilian scenario where important second crop-producing regions face adverse weather conditions for crop development, production in 2021 ends at the approximately 87 million tons, 15% lower than in the previous cycle. In the world scenario, the difference between supply and demand should present a volume of 25.7 million tons of consumption higher than production, which is also an important factor to be monitored as a guide in the formation of future corn prices on the international markets.

After this summary about the market overview, let's move on to Slide 8 where we presented the final yields for the '20/'21 harvest. We end the '20/'21 harvest with good results. Operational efficiency deliveries that demonstrates our pursuit of distance from the national average, another strong pillar of our current strategy. In soybeans, productivity reached 3,970 kilograms per hectare, fourth consecutive year of record and 12.5% higher than the national average. Cotton from first and second crop harvest and with an average yield of 1,815 kilograms per hectare, 5.6% of higher than national average. In corn second harvesting, we obtained 5,715 kilograms per hectare of productivity, 41% higher than the national average. The productivity realized in -- was below the estimated potential due to the irregularity in the distribution of rain volumes throughout the months of March and April mainly in the farms of South Mato Grosso.

On Slide 9, we showed the results of the independent land valuation for '21 carried out by Deloitte. In August, the new valuation of SLC AgrÃcola's land portfolio was completed, which had a total value of BRL 6.9 billion, an increase of 75.2% compared to 2020. The average value of arable land is currently at BRL 35,700 per hectare, which brings our NAV to BRL 8.3 billion, which corresponded to NAV per share of BRL 43.34 per share.

Now I would like to turn the floor over to my colleague Ivo Brum, CFO and Investor Relations Officer, for comments on the main financial indicators.

[Ivo Brum, executive]

Good morning, everyone. Can we please move on to Slide 11 where we bring you some highlights of our income statement for the third quarter of 2021. Before analyzing the numbers, we'd like to point out that as we took over the management of Terra Santa Agro business in this quarter, the consolidated interim financial statements also include the result of Terra Santa Agro. To enable comparability between periods, data for third quarter 2020 and 9 month '20 reflect the combination of data released by SLC AgrÃcola and Terra Santa Agro both periods -- in both periods. Our analysis were conducted in relation the combined periods.

Net revenue grew 2.4% in the third quarter 2021 and 13.3% (sic) [ 33% ] in 9 month '21 compared to the same period of the previous year.

Highlights. Higher price invoiced in both periods, it should be noted that this quarter we had the contribution of BRL 112 million in net revenue from Terra Santa. In the quarter, adjusted EBITDA was record, ending the period at BRL 330 million, an increase of 36%. The adjusted EBITDA margin was 34%, (sic) [ 35.1% ], an increase of 7.8 (sic) [ 8.8 ] percentage points compared to the third quarter 2020. The main variation in the quarter were the higher gross income from crops added to the measurement of the fair value of investment properties, partially offset by general and administrative expenses.

Adjusted EBITDA from Terra Santa operation in the quarter was BRL 17 million. In 9 month '21, we reached an important milestone for the 9-month period, surpassing for the first time BRL 1 billion with the realization of BRL 1.1 billion in the adjusted EBITDA, an increase of 94% compared to 9 month 2020. The adjusted EBITDA margin was 39% with a growth of 12 points -- percentage points. [indiscernible] advance in the adjusted EBITDA refers substantially to the increase in growth income, reflected higher invoice prices for all crops and record productivity achieved for soybeans.

It is important to highlight that the new valuation of SLC AgrÃcola's land portfolio, which represent a total value of BRL 6.9 billion, an increase of 75% compared 2020. Invested properties leased to third party had an appreciation of BRL 106 million in back -- back in the third quarter period. We reached the net income of BRL 13 (sic) [ 113 ] million in the third quarter 2021 and BRL 937 million in the 9 month '21.

In the quarter, the net income from Terra Santa operation was BRL 20 million in both period with very robust growth and an increase in net margin of 18 percentage points in the quarter and 19 percentage points in the accumulated period of 9 month. The main factors that contributed for this variation were the increase in growth revenue, the effect of better sales price invoiced and the positive effect of the accounting dynamics for the large biological assets due to expectation of higher margin compared to the previous crop period.

We can move on to Slide 12 where we present the company's adjusted net debt. We ended the third quarter of 2021 at BRL 2.2 billion, an increase of BRL 1.5 billion compared to fourth quarter 2020. Net debt was mainly impacted by increase in the working capital needs, the investment in the acquisition of Terra Santa Agro and the new lease agreement with AgrÃcola Xingú. The net debt EBITDA ratio is currently 1.4x.

On Slide 13, I would like to emphasize 2 important events with board approval. On September 19 was approval by 2 million shares. On November 10 was approval to submit the proposal to bonus shares of 10% ratio. So the next days, we will have a shareholder meeting to analyze it.

I will now return the floor to Pavinato, which will present perspective for the next crop.

[Aurelio Pavinato, executive]

Please, can we go to Slide 15. In September, we start crop year '21/'22 with the expectation of planting 668,000 hectares, a 44% growth compared to the previous crop year. This strong growth in the area reflects the last 2 operations completed by the company, the business combination with Terra Santa Agro S.A. and the lease agreement with AgrÃcola Xingú.

Planting is progressing very well within the ideal window so that we currently have 82% of the planting area for soybean already planted. Short cycle and varieties are planting 100% in the best window for high production potential and enable the planting of second crop areas of corn and cotton in the best window as well. So far, the crop are showing excellent development.

In term of yield on Slide 16, we present our initial estimate for '21/'22 harvest. I emphasize that our estimates are based on historical data and taking into account a conservative base scenario.

Regarding cost per hectare on Slide 17, we can see an estimate increase of 16.1% compared to the previous crop year in reais terms. The main facts that contribute to these increases are: higher price for our main inputs, notably seeds and fertilizer; higher fuel and energy costs due to the price and tariff increases, respectively; increase in leasing costs since the percentage of planting on leased land increased to 69% in the current crop versus 58% in the previous crop year; and also due to the increase in the value of the soybean bags in reais, which is the indexation of the contracts. These increases are naturally being offset by sale price increases, as we can see on the slides, where we presented the hedge table for the next crop.

We're advancing our hedging position for '21/'22 harvesting reach international price level that allow us to maintain excellent margin in 2022. Additionally, we have already evolved in the hedge for the '22/'23 harvest due to the purchase of some inputs. We have already purchased around 20% of the demand of chemicals and 70% of the demand of potash. For both products, the price we purchased were lower the than current price marketed, especially for potassium.

Our strategy for purchase the rest of the inputs is to wait for an equity exchange ratio between the input prices and commodity prices as there has essentially been a strong increase in input prices. I emphasize that our hedging strategy is aiming to protecting and stabilizing the company's operating margins. And our track record validates the assertiveness of it is policy regardless of the short-term fluctuations in inputs and commodity prices.

SLC AgrÃcola achieved strong growth in terms of plant harvest due to the incorporation of Terra Santa Agro and the lease agreement with AgrÃcola Xingú. Aiming to adapt the internal structure to support this new cycle, we are disclosing today, communicate to the market the new structure of the operation department.

The operation department was divided into 2 departments, 2 officers, production, production and supply officer and operational officer. The officer Gustavo Macedo Lunardi remains in the supply and production officer. And the operational officer has been taken by Mr. Leonardo Celini. He used to be a regional manager, Regional 2, until now. And from now on, he's our new operational officer. We announced it today for the company and announced to the market this increment on our roster to support this expansion in terms of supply, seed production and the production of our commodities.

Finally, on Slide 20, we comment on some actions taken in terms of ESG. We are conducting a new materiality survey with our stakeholders, which will be used to review the topics of greatest interest and strategic relevance. That is, those that can be influence decisions and actions of the organization and its stakeholders, reflecting significant economic, environmental and social impacts inside and outside of the organization. Based on this, priority teams will be identified that will be presented and validated by the company's senior management and will support the construction in the '21 integrated report.

In view of the socioeconomic crisis that Brazil is facing due to the pandemic, this quarter, SLC AgrÃcola donates through the SLC Institute 180 tons of food that will be -- will contribute to improve the reality of thousand of Brazilians if -- one of the institutions benefited from the food bank is from Rio Grande do Sul. In all, associations, entities and families from more than 30 municipalities located in 7 Brazilian states received food baskets.

Thank you, and now we will open the call to the questions session.

[Operator]

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