SLC Agricola SA

BOVESPA:SLCE3

Earnings Call Analysis

Company Expects Tightened Margins and Normalization

The company has successfully hedged early for commodities, resulting in 99% of the '22/'23 grain crop being sold. However, logistics costs affected this year's numbers, significantly impacted by higher freight costs, and Brazil lags in hedging for the '23/'24 season. Elevated margins of an EBITDA of 40% and net of 20% in the past two years are viewed as one-offs. They anticipate a return to more normal levels. Cotton volumes grew but involved prior season's produce, and no cotton from the '21/'22 season is expected in the fourth quarter, which may lead to lower costs.

SLC Agrícola's Q3 2023 Results: Global Perspective and Market Dynamics

SLC Agrícola started its third quarter earnings call with a global perspective on cotton and soybean markets. The company highlighted a production deficit of 3 million bales in global cotton due to significant losses in the US, presenting an opportunity for Brazil to increase its market share and solidify as a significant global player. In contrast, the global soybean market is expected to see a surplus, and despite a downward trend in prices, Brazil's soybean demand remains strong with record exports. Meanwhile, corn prices displayed volatility, but Brazil's corn exports reached new heights, positioning the country to become the world's largest corn exporter.

Planting Progress and Weather Impact

SLC Agrícola's soybean planting is progressing well with favorable conditions created by an early planting window, despite below-average rainfall due to the El Niño event. The company has already hedged a significant portion of the '23/'24 crop, indicating solid risk management practices. Furthermore, they are implementing waste treatment initiatives, projecting a notable increase in the recyclability rate of participating farms within six months.

Yield Achievements and Strategic Constraints

The company maintained record soybean yields and saw recovery in cotton yields, driving a positive financial performance with higher margins from increased net revenue in the quarter, despite a slight decrease in the first 9 months. They reported a robust EBITDA margin and net income growth, with a very comfortable leverage level of 1.34x net debt over EBITDA. On the operational side, there might be constraints on expanding cotton planting due to limited harvesting capacity, signaling a strategic focus on increasing production rather than acreage.

Share Buyback, Stock Liquidity, and Capital Allocation

SLC Agrícola's Board of Directors initiated a new share buyback program, alongside a share split to enhance the liquidity of the company's shares and ease trading for small and non-professional investors. The company indicated its stock repurchase decision by comparing the attractiveness of buying back shares versus land acquisition, emphasizing the current undervaluation of their own stock at BRL 40 and asserting that it is significantly cheaper than the alternative land investments.

Future Outlook and Risk Mitigation

Regarding future strategy, SLC Agrícola acknowledged the risk of reduced second crop yields due to lower margins prompting farmers to cut costs. Nevertheless, they've managed to present a hedge on cotton, although market liquidity remains a concern, and the USDA report is anticipated to influence the industry. The company emphasized leveraging technology in seed production as a potential upside, noting that investments in seed technology haven't necessitated cost sacrifices.

Earnings Call Transcript 2023-Q3

[Rodrigo Gelain, executive]

Good morning, everyone, and welcome to SLC Agrícola's Third Quarter 2023 Earnings Conference call. My name is Rodrigo Gelain, I am the Financial and Investor Relations Manager. Joining me this morning, we have our CFO and IRO, Ivo Brum. It's a privilege to be with you this morning. Please note that this video conference is being recorded and will be available on the company's IR website, where you can also find the presentation. For those who need simultaneous translation, we have this tool available on Zoom, on the globe icon under the description interpretation. It's located on the bottom center of the screen. When you select it, please choose your preferred language, Portuguese or English. For those listening to the video conference in English, there is an option to mute the original Portuguese audio by clicking mute original audio. [Operator Instructions]

We would like to emphasize that the information contained in the presentation and any statements made during the video conference regarding SLC Agrícola's business outlook, projections and operating and financial goals represents the company management's beliefs and assumptions as well as information currently available. Future considerations are not performance guarantees as they involve risks, uncertainties and assumptions because 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 operational factors may affect SLC Agrícola's future performance, leading to results that differ materially from those expressed in such future considerations. Now I would like to turn the floor over to our CFO and IRO, Ivo Brum, to begin our presentation. Ivo, please proceed.

[Ivo Brum, executive]

Thank you very much, Gelain. We appreciate everyone's participation in SLC Agrícola's Third Quarter 2023 Earnings Conference Call. Let's move to Slide 4, where we discuss the cotton market scenario. The global cotton consumption outlook estimated at 116 million days according to U.S. data for '23, '24 versus a production scenario of 113 million days results in a deficit of approximately 3 million days in the global demand and supply balance. The current deficit scenario reflects significant production losses in the U.S., where the final production is expected to reach 12.8 million days, approximately 17% lower than the initial production estimates for the country according to USDA data. This phenomenon is expected to directly impact the global cotton market as the United States currently holds the position of the world's leading cotton exporter. Consequently, Brazil is expected to continue increasing its market share and solidify its position as a significant global player now in the second largest cotton exporter position. Also, we have some news on the demand side. In Asia, the operation rate of the spinning industry has been higher than average, around 61.1%. In China, posted record cotton imports in August and September, totaling 180,000 and 240,000 tons, respectively, and also imported cotton yarn during the same period, 190,000 and 180,000 tons, demonstrating that cotton fiber is in demand.

Given the scenario, the company remains optimistic. Moving on to Slide 5. Let's discuss soybean. Soybean prices in the CBOT spot contract and the prices paid for the commodity at the paranagua CPA base showed a downward trajectory throughout the third quarter of 2023. This trend was influenced by the supply and demand balance, which on a global scale for the '23-'24 crop year is expected to show a surplus of approximately 17 million metric tons. In the United States, in the current cycle, '23, '24, well, the cycle started with losses due to draught conditions and reduced planted acreage in comparison to the previous year. The initial production estimate of 132.7 million metric tons was revised down to 111.7 million metric tons, resulting in a net loss of approximately 11 million metric tons. Soybean demand in Brazil remained strong with record exports over the first 9 months of the year, reaching 87 million metric tons compared to BRL 70.4 million in 2022. Approximately 40% of soybeans have already been planted in Brazil, consistent with the average over the last 5 years. In Argentina, I been planting began a few days ago.

At this moment, we are monitoring the development of the South American crop and accounting for its impact in the global supply and demand balance. Now let's turn to corn. Corn prices in the BOT spot contract and in the domestic Brazilian market exhibited significant volatility throughout the third quarter of 2023 in a quarter marked by the irregular development of the U.S. crop, where adverse weather also impacted production. In the global scenario, there is still ongoing uncertainty around the Russia-Ukraine conflict and the USDA predicts Ukrainian production to amount to 28 million metric tons. And production should outstrip demand in approximately 23 metric tons -- million metric tons. Regarding demand for the crop in Brazil, the national trade balance reported the highest year-to-date exports in the comparable year, reaching 34 million metric tons versus BRL 24.2 million in 2022. Brazil is expected to become the world's largest corn exporter in the world. In Argentina, corn planting has already begun with approximately 22% of the [indiscernible] normal crop conditions. After this brief overview of the 3 main crop scenarios. We now move on to the closing numbers of the 22 23 harvest. In Slide 7, we show the yields achieved in the '22, '23 harvest. We maintained record soybean yields and recovered our cotton and cotton yields.

Also, we secured a reasonably priced input package and notwithstanding the increase in costs with the fact that we had a residue of phosphorus and potassium. We bought only 80%. We completed the cotton harvest with 2,025 kilo of lint per hectare, 7% higher than planned and 37% -- 36% above the '21, '22 season. For soybeans, we concluded harvesting with a yield of 3,904 kilos, only 1.8% lower than the previous year's record. We also finished the corn harvest with a yield of 7,666 kilos per hectare, in line with the initial plan, but 22% higher than in the previous season. We achieved above-average yields in all crops when compared to CONAB data. I will now turn it over to Rodrigo Gelain again.

[Rodrigo Gelain, executive]

Okay. Let's analyze now our financial performance. Can we please proceed to Slide 9, where we highlight some of the key points in our income statement. In the quarter, net revenue increased by 22% compared to the same period last year due to higher volume and higher build prices of cotton lint and corn prices. In the first 9 months, the slight decrease in net revenue was due to the lower amount of cotton lint and soybeans billings, reflecting lower yields in the '21/'22 season.

And in the quarter and the first 9 months, the variation of the fair value of biological assets show the appreciation of cotton lint and also cotton seed as a main factor. The margin expanded, thanks to the higher yield in the '22/'23 crop year. Net profit for the third quarter '23 was BRL 167 million with a net margin of 10% and also expanding in relation to the third quarter '21.

And we had margin of 20.5% margin and net income of BRL 1.1 billion. Adjusted EBITDA for the quarter reached BRL 492 million with an EBITDA margin of nearly 30%. And in year-to-date numbers, adjusted EBITDA amounted to just over BRL 2 billion with a 38% margin. Cash generation for the quarter was positive at BRL 580 million reflecting the financial cycles phase at the end of the input payments and the start of the cotton and corn billings for the 2023 -- '22 and '23 crop.

Now let's talk about the company's indebtedness. Adjusted net debt closed the quarter at BRL 3.6 billion, up BRL 1.3 billion compared to the fourth quarter '22, mainly due to the funding of the '22, '23 crop. In the fourth quarter, this is expected as part of the financial cycle. And the net debt over EBITDA ratio stood at 1.34x a very comfortable leverage level.

Now moving on to Slide 11. We discussed the new share buyback program and the cancellation of 5 million shares that were approved yesterday by the Board of Directors. Additionally, the split of all outstanding ordinary shares issued by the company was approved with each existing ordinary share becoming 2 ordinary shares.

As a result, the company's capital will consist of 443,329,716 ordinary shares with no par value. The split will be based on the shareholding position on the date of the General Assembly meeting in which the split is approved. This move aims to increase the liquidity of the company's share and to make it easier for small and non-professional investors to trade the company's existing and outstanding shares. Now I'll turn the floor over to our CFO and IRO,Ivo Brum.

[Ivo Brum, executive]

Now let's present the outlook for the '22, '23 crop. Can we please advance to Slide 13. Soybean planting is progressing well with 71.3% of the area already planted. The current rainfall conditions the Midwest and Northeast regions are now below average due to the El Nino event. However, the early planting window provides favorable conditions for crop yields.

Advancing to Slide 14. We take a look at our hedge position. We've made significant progress in hedging the '23, '24 crop, reaching 45.8% for soybean with 14.1% of commitments, 35.4% for corn and 13.5% for cotton. Now in the slide 15, we take a look at our ESG update. During this quarter, we implemented circular economy waste treatment at the pioneira farm following the successful implementation at Pamplona, Parnagua and Parceiro Farms.

As a result, we project that within 6 months, the recyclability rate of waste will increase from 39.2% to 98.6% at the participating farms. So we -- now we have the circular economy program in place in 4 farms. And by 2026, all firms will have implemented the program.

[Rodrigo Gelain, executive]

Thank you very much, and I will open for the Q&A.

[Rodrigo Gelain, executive]

[Operator Instructions] We have a first question from Gabriel, Citibank.

[Gabriel Coelho Barra, analyst]

Okay. Let me open my camera now. Ivo and Gelain, I would like to address 2 points. First of all, in relation to climate conditions, we have seen extensive draughts. And you mentioned that there was a slight delay in the planting of soybean in terms of planted area. And there is a concern in relation to the winter crop for corn in relation to the window, and you have updated the area for corn and expanded this area.

So first of all, I would like to ask is there any room for expansion in addition to the exchange in the corn and replacement by cotton. And also, if there is a possibility for that, if we have greater losses or greater delays in relation to the planting window of second crop of corn or cotton.

And also, if you could give us an update in Brazil, specifically, if you see any relevant impact on yields, perhaps a downward revision in corn for this season. And also in terms of capital allocation and in relation to the share buyback program, this is a new one. Of course, you closed the previous one recently.

I would like to ask you, can you give us a little more flavor in relation to land expansion, the land bank and also opportunities in Brazil. And could you give us a little more color in relation to land, the buyback program for us to think in relation to the future, what the future holds.

[Ivo Brum, executive]

Gabriel. In relation to the climate, in fact El Nino is in effect, affecting the Brazilian Midwest and Northeast in the comparison with the previous year, the same comparable period. You asked about the window for corn and cotton. What is important for us right now is to meet our plans for early soybean planting so that we could start planting cotton, and we met our goals in that regard.

Now at the end of the -- well, we will harvest in February, and then we'll have the second crop care, and there could be small delays in a couple of forms. And this is a common situation in the Midwest. So what could happen is that in February, we could make a decision whether we should plant second crop corn in March in the areas that are lagging behind.

But I think this is very minor. And if we don't plant second crop corn, we can use other alternatives, for example, brake area or beans, there are some opportunities in which we can capture value by using other crops. In terms of an increase or expansion in cotton area, I think this is unlikely because we need harvesting ability besides planting capacity.

And our cotton genes that separate the pit from the land, well, we have already reached nearly our limit because next year, at the end of the year, probably January and February, we'll be still processing cotton. And it's not good to go into this rainy period a cotton in the Midwest and Northeast. So we have reached our limit in terms of the planted area of cotton.

And now, of course, we need to raise our production capacity. So just to close the answer, I believe there could be a reduction in Brazil in relation to the second crops because margins are too low, and it's only natural that the farmer will try to either save with cheaper seeds or less fertilizer because of the shrinking margins.

So I think that this will probably be the case. We have to monitor the conditions. But I think that there is a risk that the second crop will not produce everything that is expected. It will depend on rainfall, especially March, April and May, which are the last month, especially considering the second crop corn in the Midwest.

Now capital allocation, when we consider the price share, we see that there is a spread of almost 20%. So it makes all the sense instead of buying land, we should rebuy our own stock because it's much cheaper than land. So there will be adjustments, and there will be open programs. And now the other shares being traded at BRL 40, which in the Board of Directors' view is very low. So that's why we started the share buyback program again.

[Gabriel Coelho Barra, analyst]

Could you talk a little bit about leases and lease opportunities in the market? Do you have any prospects for improvement?

[Ivo Brum, executive]

This is a great question. In fact, our leverage is very much in control at very low levels. We have actually some room to increase our leverage and obviously, in this season, in this season year, this is possible, but more in '24, '25. So there are opportunities that are showing up in terms of proposals that are being discussed in the market, and we're trying to find the best opportunity to allocate capital. It's not only up to us.

There's always 2 parties in the negotiations with different interests. But we are making progress in the negotiations and probably up to April next year, we'll have to close the deal so that we can buy fertilizer and get the machinery. So we have more than enough time to get organized in the negotiations. So we're doing everything possible so that we can strike a deal between the parties.

[Rodrigo Gelain, executive]

Our next question is from Leonardo Alencar XP.

[Leonardo Alencar, analyst]

First of all, congratulations on the results. I think it was a positive quarter. I think we could also -- should do a follow-up on the cotton dynamic. Last quarter, you talked about hedging levels, and I think that you have reached those levels. So cotton has been beyond expectations, considering the worsening of the corn and soybean scenarios.

So if you could give us a little more information on the hedging strategy for cotton. Also because the USDA report will be published today, I would like to know how you are positioned in terms of inputs. And considering the client risk, what can we expect in terms of strategy for the next few years. Do you think that you'll change your strategy? Or do you think that the climate can sustain prices for now?

What I think is perhaps less relevant is the soybean seeds and cotton seeds, activities have been surprisingly good because there was a whole discussion in the -- in relation to the drop in seed prices. So in fact, what we see is that there is no need to sacrifice on the tech investments around seeds. So maybe the fact that you're using so much technology, this could actually bring some positive surprises.

And I would like to -- for you to comment on that. And also at what point in the season, the effects of this season disappears from the results. This is another question.

[Ivo Brum, executive]

Okay. They are not in relation to cotton hedges. We wish we had advanced much more historically. By this time of the year, we should be close to 45% of hedging in cotton. But when we go to the market to try to make the future operations, there's very little liquidity in the market. Our prices were adequate at per pound.

And -- but there is very little liquidity. So our transactions have to be very small, so that we don't cause a great impact in the current commodity market. And this, of course, makes us a little bit sluggish. Now because of the new war we see, there is an impact in the Middle East as well.

This has weakened prices, but with the issuing of the new USDA report, we hope that the market will react. This level of prices is not attractive to American producers whose costs are much higher than $0.80. So for them, it doesn't make any sense to produce carton at a loss, so prices have to go up because the United States is the top producer and the top exporter.

Brazil could actually surpass the U.S. in cotton exports. If the acreage forecast in Brazil materializes, we could actually produce more than the U.S. So of course, we would like to advance our hedging. We are working towards that but because of the economic conditions on the global scenario, the traders and the spinners, they are closing contracts more on the short term.

So we have short-term contracts in December and March. And we hope that by February, this will change because we'll have the new season in the U.S. and contracts for '24 and '25 will get bulkier, and I think it's going to be much easier to hedge.

Well, seeds. Now seeds are really important, quality. Seeds really secures a winning start in terms of yield, and I think that Brazilian producers are very much aware of that. With quality soybean seeds, you can really -- and with the adequate management, you can get results and yields that are far superior. So it's worth invest. It's worth it to invest in seeds.

And that's why this market is prospering. So even though soybean is being traded at lower levels -- at lower prices than last year, margins are still good. It's the best crop we have today. And we increased the cotton acreage because we get more per hectare, but the margins in soybean are still better. In corn, margins declined significantly. So whoever can plant more cotton, they're planting cotton rather than corn.

As for the season, there will be a season in the '22, '23 crop, carton will come next year. And as of January, we will see soybean from the new season. So up to the second quarter, we'll have soybean '23-'24 and cotton '22, '23. And of course, there will be an overlap in the first half, we see cotton and second crop corn in the '23 and '24 season coming in but we still believe -- be delivering soybean in the second half of the year because the premiums are higher.

And we use our storage capacity to be able to capitalize on this premium.

[Leonardo Alencar, analyst]

Just a question, a clarification, if I may. You -- well, you already commented on your land -- so what is the temperature of the -- in the land market? Is it a standstill our cattle ranchers sending -- selling degraded pasture?

[Ivo Brum, executive]

Yes, there are some offers available in the market. But this is not -- this -- in this half of the year, there are not too many negotiations because if you have land, you're already planting and you have acquired land, you don't have enough time to get organized to plant. So negotiations usually occur in February, April next year.

This is the window for negotiations of land, but acquisitions and operation of new land is something that's almost and feasible. So we'll see more transactions occurring next year. But of course, there are some land offers circulating and being presented to us.

[Rodrigo Gelain, executive]

The next question is from Lucas Ferreira, JPMorgan.

[Lucas Ferreira, analyst]

Well, I have 2 questions. Firstly, about the expenditures line, both SG&A and selling expenses. I know that this is partly sharing of results, but also selling expenses and SG&A is growing above inflation. So I think this has probably linked with seeds. Should we expect to line to grow above inflation next year?

And in administrative expenses, what can we expect? Is inflation a good yardstick? Or do you think that there's anything you can do to decrease expenses? And also in relation to the selling and margins selling volume and the margins that you expect for carbon, the carton margin has expanded in sequence. So considering your hedging and also the cost formation. Can you wait for the margins to continue expanding in the next 2 quarters, just to get a perspective on the end of this year and early next year.

[Ivo Brum, executive]

Thank you, Lucas, for your questions. Let's start with administrative and selling expenses. In recent years, we switched our operational system. We were using Oracle, which was outdated, and we adopted SAP. This, of course, led us to a new level with much tighter controls, better controls, but increase our expenses. We now have service -- a shared service center in Portalegre.

This is also increasing our administrative expenses, but we are preparing for a new leap, a new leap of growth in the future will be able to get the rewards of these expenses. We want to grow without increasing our SG&A expenses. Well, we're still -- we have implemented SAP, and we are implementing improvements on a monthly basis.

And also then there are the selling expenses related to soybean seeds. If we want to reach 2 million bags of seeds, we need more sales representatives. So we are increasing our sales department, we need to hire people, give them training and progress is gradual. But we are getting prepared for a new leap of quality, both in terms of acreage and in sales. So that's why you see this increase in SG&A.

As for the cotton margin, I'd like to refer to the chart the unit type. So carton in this season, it's now the third quarter. The unit gross result, considering hedging and costs is BRL 4,005. This is excellent in comparison to last year, which was at BRL 3,677. So a very significant improvement in margins. We also increased acreage for the next season. Because we know we can maintain this level of return. Fertilizer prices are now decreasing. And we know that we can maintain the level now. Soybean corn are now suffering in terms of prices.

Cotton had gone through this process in the past. Now cotton is now at $0.80, and it's stable and soybean and corn continue to be on a declining curve. So soybean in the year. If we look at the year because in the quarter, it's a little more difficult to analyze because there is the impact of the different farms.

So in 2023, the result per ton is BRL 1,200. And last year, it was BRL 1,117. In corn, the result in the quarter is BRL 309 per ton. Last year, it was BRL 183. And we just harvested the '22, '23 harvest. So the result per ton of corn is very low. And any small change will have an impact. That's why we are decreasing the corn acreage. This is the focus. Cotton now has a contribution of BRL 4,000 per hectare. So it's worth it.

[Rodrigo Gelain, executive]

The next question is from Matheus Enfeldt, UBS.

[Matheus Enfeldt, analyst]

Two follow-ups on climate conditions. Well, we talked about the climate risk, especially for corn, double crop -- second crop corn. And I would like to ask about soybeans. From the moment the forecast of the season was announced, well, the climate conditions have worsened, some consulting firms have been talking about the risk of replanting in some areas. So what is the yield estimate for being in the '23, '24 season?

Is there a risk of having to revise down estimates? And also considering climate what's the impact of climate in company costs, if there is a delay or a potential reduction in the technology used in corn or another transfer of acreage from corn to carbon. What about the inputs? And how are you preparing for this scenario?

And my second question considering growth, you said that you are very optimistic about growth in '24 and '25. So are you thinking of converting pastures into agriculture considering that soybean margins is still very solid. These are my questions.

[Ivo Brum, executive]

Thank you very much, Matheus. Well, the most important thing right now was planting. The conditions were adequate. We actually had -- the rain is coming earlier this year in the beginning of September and our, of course, window starts in mid-September. So we planted in September. After September, we had enough rain for planting, there was enough humidity in the soil.

There was a long draught before that so we planted. Now the plants they grew. And now we have to keep on monitoring. Is there a risk of replanting in Brazil? Yes, because we know that rainfall is now irregular in Brazil. And it's not uncommon that you have replanting. In some farms, it's not something unprecedented.

It's always been the case. So everybody plans 1,000, 2,000 hectares, sometimes 5,000 hectares. Of course, you have an impact in cost because you need to spend more fuel and spend more on seeds, but plants have an amazing recovery potential. If they don't die and if it rains, they quickly recover.

Of course, there's always the risk of losing potential because plants also have a cycle. We need to harvest soybean in January and February to plant the second crop. If in this cycle, the plant is stress, maybe the yield will be affected. But specifically in Mato Grosso, where rains total 2,000 millimeters, it's quite rainy Well, soybean needs around 700 millimeters. That's enough.

And in the United States this year, there wasn't enough rain. We visited some areas there, and they observed clearly by talking to producers that it rained much less than expected. But if it rains, the plant can recover, if it's during the grain development phase, we're going to have robust rain. So in the end, we can have good yields.

And actually, the American yields were surprising considering the low level of rainfall. In terms of fertilizers and the change of the tech package for the second crop. In terms of reduction of acreage, this is going to be very limited in Brazil. It's not going to be substantial. And we already made the decision in relation to the tech package. So we're still looking at the margins because corn prices are low. So we try to save on fertilizer and seeds. Seeds are very important as well, an important input in corn costs.

So this has already been decided, so we don't expect a lot of changes in production levels. What could happen is that if you don't plant second crop corn, you could migrate to mangos beans. So there are several alternatives. So instead of planting second crop corn with low productivity, you can buy -- you can plant Mangos beans with better results.

So we've been talking to our consultants and the impact will be minor in Brazil. It's not going to be significant. Of course, we're still at the beginning of the cycle. Soybean harvest starts in January. So we still have 45 days to that. As for pasture conversion, considering fertilizer prices, this is an option again. Fertilizer prices were too high last year. So it just made it impossible.

Now with the lowering of prices, we can study this now soybean prices continue to decline. So we need to understand very well and you need the leverage forward because return on investment will come only after 4 or 5 years. So you need leverage for you and the ability to make investments. And in our case, this is fully possible. So it's another capital allocation option for us, pasture conversion.

[Rodrigo Gelain, executive]

Our next question is from Isabella Simonato, Bank of America.

[Isabella Simonato, analyst]

I would like to go back to the discussion on cotton. When you talk about liquidity, could you explore your perspectives in relation to the opportunities to step up hedging. You mentioned that there was a decrease of $7 -- $8 in cotton prices. What was the reason for it? And what are the foundations are the foundations still positive? And what are the other strategies that you have available to protect the profitability of the new season?

[Ivo Brum, executive]

Thank you very much, Isabella. Why are we optimistic about cotton? First of all, because American producers have higher cost than us. So we can anticipate a reduction in acreage. Also, textile consumption in the U.S. we track imports in the U.S. and Imports are growing. And by talking to economists, we understand that during COVID, the Covid pandemic, they were basically locked down, they didn't spend much.

Americans don't have this culture of savings. So that's why the American government cannot curb inflation because if they have money in their pockets, they will spend and they had to spend less for 18 months during the pandemic. So there is a strong trend in imports, prices reached almost $0.82 per pound.

This, of course, started around future contracts, but the market is more conservative. It's more focused on the short term. So there are a few contracts for December '24 being negotiated. So we have to dance according to the music bands according to demand. Now there was a reduction in costs because of the new conflict on the planet and people are more reticent.

Well, this could lead to inflation. What about consumer confidence in a scenario like this? So what the market does initially is to take a step back, commodity prices go down, oil prices go up, and we still have to wait and see what's going to happen? Cotton was going up today again, but we have to wait and see. We wish our cotton hedging was more advancing, but if we don't have the buyers. We have to just wait.

We wish that we had more hedging. We discussed this at length during the Board of Directors meeting. But unfortunately, it's part of the deal, it's part of the business. there are many events out of control cropping up, such as the conflict in the Ukraine and the new conflict, the changes and think cotton is traded based on the global GDP.

Whenever something affects the GDP expectations, cotton is the first one to react. The other grains don't really move much because it's food and demand remains consistent. There could be a minor decrease, but it's different from cotton because cottons could -- cottons and textiles could see a more drastic reduction.

So for the contracts of December '24, we expected that volume in these contracts will be higher and like this, we'll be able to advance in hedging. And any opportunity that we get, we will use it. But this is what we expect in terms of volume of transactions. This is also the moment in which Americans announced the first numbers of acreage.

And we expect the U.S. to reduce acreage, and then we'll have basically Brazil. Brazil will be a major cotton producer in the world and with the reduction of acreage, we won't have enough supply to meet the world's demand.

[Rodrigo Gelain, executive]

Our next question is from Thiago Duarte, BTG Pactual.

[Thiago Duarte, analyst]

I think that some of the main points were discussed. Now in relation to the basis and the freight discounts. This year was tough for the industry in terms of shipping and storage capacity. You did well because you had already contracts for the freight. And what is the situation for next year? I believe that this discussion is already underway, probably.

And also considering in the case of second crop corn or also in relation to possible replanting perspectives. So I would like to hear about you considering the industry and not only the company, how do you view this point for next year?

And now a question that summarizes much that has been discussed in relation to margins per crop. Could you please tell us a little bit about the consolidated numbers. You've made it very clear to us that it was a period of exceptional margins in the last 3 seasons. And that you expected that in '23, '24, margins would bounce back to normal because we were at levels of 40%, and then they would go back to the average of 30 events starting this year and also next year. Is this still your expectation considering the change in mix the situation in hedges and the decrease in costs, could we expect margins similar to this year? This is the question.

[Ivo Brum, executive]

Thank you very much, Thiago. Well, the logistics costs had a strong impact this year, we had hedged for commodities. Well, we had hedged for commodities early. Now -- well, corn that had no storage capacity was already shipped by September. So that's why we're positive and soybean. We started shipping soybean, and we can see that what we delivered in soybeans was much below than last year because prices were too high in freight.

Now things are stabilizing. It is a fact. Freights are more expensive. This is also impacting our margins for next year. Now we have 99% of the '22, '23 grain crop sold. But for next year, margins will be squeezed. And let me go now into your second question. And well, actually, in terms of logistics, Brazil is lagging behind in the hedging for the '23/'24 season, we are not at historical levels, also owing to the pressure in logistics.

Everybody is aware that next year, there will be this crunch in terms of volumes that are shipped. And evidently, margins for next year, they are being penalized margins are shrinking, and we expect that we'll go back to the historical levels, an EBITDA margin of 40% for 2 years, a net margin at 20%. Those are exceptional numbers, but they are one-off occurrences because it really doesn't make sense. It's only normal that your acreage will increase with margins like this. Obviously, there are several initiatives that we are implementing in the area of technology with cotton and corn seeds.

Of course, this also impacts our margins because we are adding more technology. We are reducing input cost. We are using several chemicals and crop protection. So I think that it's -- it is to be expected that we'll go back to more normal levels.

[Rodrigo Gelain, executive]

Our next question is from Larissa Pérez, Itau BBA.

[Larissa Perez, analyst]

Well, first, I have a follow-up on Carton and then a question on CapEx. In this quarter, your cotton volumes grew very significantly, but almost half of the volume related to the previous season. So what should we expect for the fourth quarter in terms of current volumes? And do we still have volume coming from the previous season?

The reason I'm asking is that if the volumes were not there, maybe we could reduce -- we could see a reduction in cost in the fourth quarter. Also in relation to CapEx, there was a very significant decrease coming from the machinery and equipment lines. What can we expect for this line in the medium and short term? Does it make sense to invest in machinery to harvest more cotton considering the very expensive margins in this crop.

[Ivo Brum, executive]

Yes, Larissa, in this last quarter, we had the '22, '22 on cotton crop being delivered because we still -- just like the other crops in cotton, we have logistic issues. So the ports are in high demand. Cotton is exported in containers. It's a delicate product with fire risk. So the ports don't like to stock up a lot of cotton. And this makes the process longer.

Ideally, we should deliver our products in one season before we started shipping the next season. But I think that in the fourth quarter, we won't have any cotton from the '21, '22 season. It's all going to be -- have been delivered and probably will have lower costs because since we produced less cotton last year, there was a loss of productivity, then unit cost per carton are higher.

So margins are better because obviously, our cost per ton is lower, and we produce much more. So in the fourth quarter, we should see the impact of that. Now as for equipment purchases, with the end of quarter, well, we usually buy more equipment in the first quarter.

Sometimes you buy in the second half because you need it for harvesting for planting so you make your acquisitions. In this year, we have nothing new to plant the acreage is exactly the same if we had higher acreage, we would have bought more equipment. Of course, last year, we were also trying to provides [indiscernible] with more equipment, several acquisitions were made with no increase in acreage.

This year, everything is all right. So whenever we increase the cotton acreage and we have a limit, of course, we are going to need to invest more in this crop, building more cotton facilities, increasing the number of cotton harvesters. And today, we have Muconero, Parceiro and other farms where we don't plant cotton yet, then it's possible that we'll continue to invest in these areas. It's a high investment. So that's why we invest a little year by year, like [indiscernible], we tried to monetize the investment in machinery.

And once everything is up to standard, we can start the portfolio cotton portfolio in those farms as well.

[Rodrigo Gelain, executive]

We have one more question from Mauro Santos, Investor.

[Mauro Santos, analyst]

Well, wheat. Could wheat be increase for the 2024 projections.

[Ivo Brum, executive]

Yes, we have new varieties that are being used in the Brazil and Midwest and they adapt easily. Which needs cold weather. And we have a small season with cold weather. And the problem is the lack of rain at the time that when we need cold weather.

So in the south of Gaia in other terms, we use wheat in crop rotation and it's a good alternative because prices are going up and the new cultivars are adapted and can bring us excellent results. So I think that we should increase the wheat area and it's going to enhance our crop portfolio.

And since Brazil is a large importer of wheat, our wheat has import quality and of course, you have a gain there. There are some aspects that need to be adjusted, but we see wheat as a potential crop for Brazil potential investment crop.

[Rodrigo Gelain, executive]

Okay. If we have no more questions, the video conference call on the third quarter 2023 is now close. Our Investor Relations department will be happy to take any of your questions and comments. Thank you very much for attending, and have a great day. Thank you.

[Portions of this transcript were spoken by an interpreter present on the live call.]