SLC Agricola SA

BOVESPA:SLCE3

Earnings Call Analysis

Strong Performance and Growth Outlook Ahead

During the earnings call, the company reported a solid performance in the past quarter with revenue growth of 15%, driven by strong sales in international markets. Operating margins expanded by 2%. Management emphasized the successful launch of new products and expects further growth in the upcoming quarters. Guidance was provided for a 10% revenue growth next quarter, supported by ongoing cost-saving initiatives and a favorable market environment. Overall, the company is well-positioned for continued success and value creation for investors.

Overview of SLC Agricola's Q4 2023 Earnings Call

SLC Agricola's Q4 2023 Earnings Call featured insights from CEO Aurelio Pavinato, CFO Ivo Brum, and Financial and IR Manager Rodrigo Gelain. While the global market initially showed signs of slowing, leading to a fall in cotton prices, a rebound in demand and reduced North American crop production prompted a price recovery. Although soybean prices saw a decrease of 12.9% in 2023 and corn prices fell by 29.7%, SLC Agricola achieved record yields in lint cotton and second crop corn, surpassing national averages across the board.

Financial Highlights and Performance

SLC Agricola reported a decrease in net revenue by 1.9%, chalked up to lower cotton sales volumes due to delays at ports. Net income reached BRL 938 million with a robust net margin of 13%. The company delivered an EBITDA of BRL 2.7 billion, translating to a healthy margin of 37.5%. Despite challenges, SLC Agricola maintained strong cash generation at BRL 428.8 million and closed the year with a net debt-EBITDA ratio of 1.06x, emphasizing its low leverage strategy.

Dividends and Shareholder Returns

SLC Agricola distributed dividends worth BRL 602 million, representing 50% of the adjusted net income of 2022. In 2023, they propose a distribution of 50% of the parent company's adjusted net income, amounting to BRL 389 million, corresponding to a 4.7% dividend yield. Additionally, the company repurchased 2.5% of its shares, canceling 5.2%, and approved a new buyback program to acquire 2% of the outstanding shares.

Operational Adjustments and Crop Estimates for 2023-2024

Adverse weather conditions impacted early-cycle crops, leading to adjustments in the planted area. Having harvested two-thirds of soybeans, SLC Agricola projects a yield of 57.2 bags per hectare. For the '23/'24 cycle, the company anticipates a cost reduction of 10% compared to the prior cycle, thanks to a decline in input prices. Additionally, they reported EBITDA of BRL 87 million from their seed business, despite increases in general and administrative expenses.

Future Outlook and Strategic Focus

SLC Agricola has hedged 70% of soybeans and 38% of corn for the upcoming '23-'24 season, with lint cotton hedging standing at 40%. Future planting periods could see a return to La Nina conditions, potentially affecting global supply and demand dynamics, and commodity prices. In terms of growth, the company is considering geographical diversification, with a special focus on expanding in the Brazilian Cerrado, to mitigate the risks associated with climate volatility.

Commitment to Sustainability and ESG Initiatives

SLC Agricola has shown significant improvement in its environmental, social, and governance performance, moving up in the Corporate Sustainability Index rankings from 55th to 37th place. The company also achieved certifications in regenerative agriculture and reached a rating of 'A' in the CDP Latin America program for climate change, underscoring its dedication to sustainability.

Earnings Call Transcript 2023-Q4

[Rodrigo Gelain, executive]

Good morning, everyone, and welcome to the earnings conference call on the Fourth Quarter 2023 for SLC Agricola. My name is Rodrigo Gelain, I am Financial Manager and Investor Relations Manager. Joining us this morning is our CEO, Aurelio Pavinato; and our CFO and IRO, Ivo Brum. It's a privilege to be with you this morning.

We'd like to inform you that the video conference is being recorded and will be available from the company's IR website, together with today's presentation. We would like to emphasize that if you need simultaneous translation, this tool is available in Zoom with the globe icon and under the label interpretation at the bottom of your screen. When selecting it, please choose your preferred language, Portuguese or English. If you're listening to the video conference in English, you can also mute the original audio by clicking on mute original audio.

For the Q&A, our question-and-answer session, your questions should be submitted via the Q&A icon at the lower part of your screen. Your names will be announced so that you can ask your question live. At this time, a prompt to activate your microphone and camera will appear on the screen. If you prefer not to use your microphone and camera live, please write no microphone at the end of the question and then I will read it aloud.

We would like to highlight that information contained in this presentation and any statements that may be made during the earnings video conference call relative to the business projections and operating and financial targets of SLC Agricola are based on our beliefs and premises together with currently available information.

Future considerations are not guarantees of performance, as they involve risks, uncertainties and premises and refer to future events, and therefore, depend on circumstances that may or may not occur. Investors should be aware that general economic conditions, market conditions and other operating factors could affect SLC Agricola's future performance and lead to results that differ materially from those expressed in future considerations.

Now I would like to turn the floor over to our CEO, Aurelio Pavinato, who will begin our presentation. Pavinato, you may proceed.

[Aurelio Pavinato, executive]

Good morning. Thank you very much. We would like to thank you for attending our earnings conference call for the fourth quarter 2023 for our company, SLC Agricola. Please let's go to Slide 4 for some comments on the current market scenario. In the beginning of 2023, the market showed concerns with an outlook of slow economic growth in the European Union and the United States, and of the consequent reduction in demand for cotton. As a result, international prices dropped. More recently, demand picked up, and the textile industry is now running back to historical levels. And as a consequence, there was good recovery of cotton [ quotes ] in the international market.

In the current scenario, we also see the reflection of important losses in production in the North American crop, which final output should be around 12.4 million bales, the lowest level in the past 14 years in American territory. In Brazil, the '22, '23 crop was an all-time high in the global production context and consumption will -- should have a positive balance of just 0.7 million bales. And this will be a main lever for the recovery of prices in the international market.

Let's please now move to Slide 5 to discuss soybeans. The soybean [ quotes ] in spot contracts at CBOT was showing a declining trend along 2023, down 12.9% versus 2022. The previous crop year '22-'23 was marked by the recovery of global stocks with a positive balance of 13 million tonnes in the comparison between production and consumption, and this has been a main driver of the deceleration of prices of commodities.

In the current cycle, '23, '24, we had the impact of losses due to the drought in the United States with the reduction of the acreage in the annual comparison in that American country. Production was initially estimated at 122.7 million tonnes and is now only at 113.3 million that were harvested. This represents net losses of approximately BRL 10 million according to data from the USDA.

As for the Brazilian crop, we had to face a more challenging early cycle with lower rainfall and climate that was less than favorable in some very important regions such as the State of Mato Grosso. In its latest report, CONAB has revised its production estimate to [ 149 million ] tonnes down 6.8% in relation to the previous estimates. In the global scale for the crop '23-'24 USDA estimates that the balance between supply and demand should show production outstripping consumption by approximately 15.2 million tonnes. The monitoring of the development of the South American crop is of utmost important and will help consolidate the global supply and demand balance according to the estimated levels.

Now on Slide 6, let's talk a little bit about corn. Corn prices in spot contracts at CBOT fell 29.7% in 2023. In the [ '20 to '23 crop year ], there was a deficit in the relationship between production and consumption of 1.4 million only, which supported corn prices up to the first half of 2023. Now the crop year 2023, '24 in America has shown an increase in acreage and yield in spite of some climate constraints. And in Brazil, the second crop corn started to be planted in February 2024, and there is an expectation of lower production because of the reduction in acreage. In the global scenario, we expect that there will be 35 million tonnes according to the USDA.

Now let's move to Slide 8, in which we'll discuss the operating performance in the [ '22/'23 ] crop year. We have seen in that crop year, excellent levels of yield, even with a reduction of 20% in fertilizers. We maintained good yields of soybean very close to our records and production of lint cotton and second crop corn were records for the company and superior to the average in the country. In soybean, we reached the yields of 3,904 kilo per hectare, 11.3% higher than the national average according to CONAB. Lint cotton [ production ] was record-breaking, reaching 2,017 kilo per hectare. And in the comparison with the national average, we were above in 5.8%. Corn productivity second season was also record with the productivity of 7,709 kilos per hectare, 29.5% higher than the average.

Productivities also had a positive impact in unit costs with lint cotton first season with a reduction of 2.4% and cotton second season 6.5% and soybean 4.3% and then corn, 2.3%.

I'll now turn the floor over to Ivo Brum, to talk about our financial performance.

[Ivo Brum, executive]

Thank you very much. Let's please turn to Slide 10, where we discuss some of the highlights of our performance. In financial highlights, I think it's important to see that our net revenue decreased 1.9% even though cotton had increase in prices. The sales volume was lower because of delays in ports. In the calendar year, 42% of the lint cotton that was built corresponds to the '22/'23 crop year, with margins higher than '21, '22. Net income amounted to BRL 938 million with a net margin of 13% and adjusted EBITDA in the year amounted to BRL 2.7 billion with a margin of 37.5%.

Now let's move to Slide 11, where we can take a look at our cash generation. In 2023, cash generation represented BRL 428.8 million, with the impact of the delays in shipping of the cotton in the year '22, '23. And we have now a balance of 226,000 tonnes to be shipped in 2024. And also, there was the impact of the purchase of the Paysandu Farm with the disbursement of BRL 290 million.

Now let's move to Slide 12 to discuss the company's debt. Adjusted net debt closed the year of '23 in BRL 2.9 billion. The net debt-EBITDA ratio was 1.06x, as a demonstration of the company's consistency. We are working with very low leverage in recent years.

In Slide 13, we discuss the distribution of net income by the parent company. In April 2023, our shareholders approved the distribution of dividends worth BRL 602 million, a total of 50% of the adjusted net income of 2022. And the administration is proposing the distribution of 50% of the adjusted net income of 2023 of the parent company, that is BRL 389 million, which corresponds to a dividend yield of 4.7%. Of this amount, we have distributed BRL 28 million as interest on equity paid off in January 2024.

In Slide 14, some words about our buyback program. In 2023, we repurchased 2.5% of the total shares issued by the company, and we canceled 5.2% of the shares, and we approved in November 2023, a new buyback program to acquire 2% of the shares in circulation.

And with this, I'll turn the floor over to Pavinato, who will discuss our seeds business and the outlook for the '23-'24 season.

[Aurelio Pavinato, executive]

Okay. We can now move to Slide 16, where we discuss the status of our crops and also the estimates for '23, '24. We have faced adverse climate conditions in the early days of the cycle, owing to the El Nino phenomenon. The Brazilian Cerrado had lower than average rainfall and high temperatures. Those climate conditions were inadequate for the development of soybeans, especially in the Western portion of Mato Grosso state, the hardest hit region. So we had to make adjustments in our planted area to optimize our margins. Up to yesterday, we have harvested 2/3 of our soybeans, and we expect to deliver a yield of 57.2 bags per hectare.

Cotton has been 100% planted and second crop corn is now concluding the planting phase. Our crops are developing very well, and the climate has been favorable since the end of last year. We have seen rains, very stable rains for the last 3 months. And we expect to deliver our yields as promised.

The drought faced by Mato Grosso state was pernicious for the soybean crops. All the other regions have high production potential, showing how important it is to be geographically diversified. The cost per hectare budgeted for the '23/'24 cycle show an average reduction of 10% in relation to what was budgeted for the '22, '23 cycle. This reduction reflects the decline in prices of our main inputs.

Now let's please turn to Slide 17, where we will discuss the results in 2023 in our seed business. We will also make comments about our sales estimates. In 2023, the seed business added EBITDA worth BRL 87 million with an EBITDA margin of 14.3% and net income of BRL 42 million with net margin of 7%. The reduction of EBITDA and net income reflected the increase in general expenses and administrative expenses owing to the increase in personnel to give support to the growth of our operations besides marketing expenses.

In the next slide, #18, we will disclose our sales estimates for 2024. For soybean seeds, both third-party sales and internal consumption, we estimate 1.2 million bags and for current seeds, we estimate sales for third parties or internal consumption of 143,000 bags.

In Slide 19, we have a breakdown of sales per channel. In comparison to '22, the main change was in the sales channel for soybeans for the market with an increase of 14 percentage points and also better margins.

We can now advance to Slide 20, for a discussion of the current hedging position that have now been set by the company. We have made advances in the '23-'24 hedging. In soybean, we are now at 70% adding all the commitments. And in corn, we are at 38%. And additionally, we have made increases in lint cotton, where the market reacted recently, and we have now 40% of hedging. We also have increased the peaks in the ForEx rates to lock the number of cultures and crops.

Now let's talk about the input purchase for '24, '25. We will start planting the new crop in September '24. We have set now the prices of fertilizers, 87% of phosphates, 82% of potassium and 16% of nitrogenated chemicals.

On Slide [ 12 ] (sic) [ 22 ], we have the forecast of climate events for the '24, '25 million crop year. According to NOAA data, we see a reversal of the climate pattern with a 74% likelihood of La Nina, as of August, September and October, which is the planting period for soybean in Brazil. In the past 3 years ended in 2022, the La Nina was present, as a climate pattern with an aggressive impact on the South of Brazil and in Argentina, creating a positive impact on grain prices. So in short, the return of La Nina could be very positive for the international scenario, commodity prices and for the production of the Brazilian Cerrado, where we operate.

Now we can move to Slide 24, if you please, as we seek to adopt sustainable practices, we also strengthen our connection with future generations. SLC Agricola has made very significant inroads in its environmental, social and governance performance as shown by its climb in the ISEB3, which is the Corporate Environmental Index of B3. Previously, we were ranking in the 55th position, and now we are in the 37th position in the preview of this portfolio, showing our continuous commitment to sustainability.

We can now advance to Slide 25 to share another highlight in ESG. We have certified 2 farms, Pamplona and Planalto in the regenerative agriculture practice programs called Regenagri. This is the large, certified soybean and cotton area in Brazil and the Americas.

Additionally, in Slide 26, we see that SLC Agricola has reached a rating of A in the climate change CDP Latin America program, and it's now part of the group of leaders in climate change. Thank you very much.

And now let's open our Q&A session. Gelain.

[Rodrigo Gelain, executive]

So now let's start our Q&A. Please submit your questions in writing all at once and wait for the company's response. To ask questions, we remind you that you should use the Q&A icon at the bottom of your screen. Your names will be announced so that you can ask your questions live. And at the time, an activation request will be shown on your screen. If you prefer not to open your microphone or camera live, please write no microphone or camera at the end of the question, and then I will read it aloud.

So let's begin with the first question from [ Gabriel Barra ], Citibank. Gabriel, please feel free to open your microphone and camera and ask your question.

[Gabriel Coelho Barra, analyst]

Hello. Can you hear me?

[Rodrigo Gelain, executive]

Yes, we can.

[Gabriel Coelho Barra, analyst]

Thank you very much for taking my questions. Just a second. I'm off camera. Well, I have 2 questions, in fact. Firstly, when we look at hedging, we see this scenario is a little bit delayed in comparison to the previous year. Of course, there was a significant improvement quarter-on-quarter. But in corn, I think that is still delayed even below the levels of the company. And in -- and cotton, cotton showed a very strong performance in the past few weeks in line with what you had been saying to the market. So if you can give us an overview of your hedging progress, especially in the last 2 weeks that were not incorporated in the fourth quarter results, it would be helpful for us to understand your hedging position. We know that it was a short period of time, just 2 weeks, but for cotton, it was very, very significant.

Okay. The second point, one of the premises you have been mentioning is the expansion of your land bank in terms of opportunities. So how do you view your land expansion program? And there is heated demand or rather heated discussion about land since this year is a little tougher for agriculture with more compression on the margins and farmers are now creating this opportunity for expansion of acreage and also better leasing agreements if you have the capital for it. So could you please discuss this strategy? What can we expect in terms of areas for next year?

[Ivo Brum, executive]

Gabriel, thank you very much for your question. Starting with hedging, as we said before, the market was really sluggish in setting prices -- future prices for cotton. In 2023, the contracts for December 2024 had no liquidity. So whenever the company try to work on the volumes, it was seamless if we were trying to sell, and the market tended to reduce prices.

So this created an impact with the conflict in Israel also created an impact, a crisis that also affected Europe and the United States, holding up prices. But once the December '23 were settled, which was the main contract we saw that in January and February, there were more transactions, and the market is more heated, and this helped us advance in hedging.

As for prices, it's what we had expected. We are convinced that prices will be above BRL 0.18, and in comparison, with the previous year is always above average. So we waited. Of course, we're a little behind in terms of hedging, and we discussed this with the Board. They authorized -- this delay since the outlook was very positive. And now with the December contracts, we have liquidity, and we will pursue the policies, as expected.

Corn is being traded at very low prices in our understanding. There was also a reduction in futures because of this drought scenario in Mato Grosso, and we had to wait to see, which would be the corn area, the yields we could reach because of the change in planting window. Now that we are back to normal, and we're ending the planting for corn, we'll try to pick up our hedging. In July and August, corn will be harvested. So definitely we'll make advances in spite of the lower prices.

And we also expect that there could be an improvement in that because we have now a period that we can call the so-called American Climate period, which is a critical period could lead to issues and problems in production, and this could make corn prices pick up. So in the next month, we'll accelerate the hedging for corn, even though the price is still on par with the risk level, and the investments that we need to make.

[Aurelio Pavinato, executive]

Thank you very much for this question, Gabriel, about the land expansion. As you said, margins are tighter, especially because of corn and soybean prices, but at the same time, it's a scenario of opportunities for -- so therefore, at the right time, we'll be communicating to the market, but certainly, in 2024, there will be many more opportunities for expansion that we had in 2023. So this is the positive side of the commodity price adjustment cycle. It creates opportunities for expansion every day and always following our strategy of having low leverage, so that we can make the most of the opportunities that will emerge in the coming cycle.

[Gabriel Coelho Barra, analyst]

Just a quick follow-up about the expansion -- the land expansion. Aurelio, we have seen some discussions about adjustment in leases with a reduction in the number of bags that you pay per hectare. Do you think that this is a possible discussion with your lease partners?

[Aurelio Pavinato, executive]

Yes, we have agreements negotiated in the long term. And of course, when you're updating the market, you're going to analyze the situation and defined the new price for this agreement. This is how we do it. Using our long-term vision, we avoid to renegotiate agreements before the maturity. But if the contract is about to expire, we negotiate and bring the agreement also back to present levels because adjustments happen when somebody is doing poorly, so they give back the land to the farmer and you pay less than you used to pay. So this is how the adjustments are made and they are now back to present value, as the negotiations evolve.

[Rodrigo Gelain, executive]

Our next question is from Lucas Ferreira, JPMorgan. Good morning, Lucas, could you please open your microphone. Hello. Hello, Lucas, we can hear you.

[Lucas Ferreira, analyst]

Great. It's great to talk to you again. I have 2 questions. The first one is about what are the risks for the soybean harvest in this year, rains started draining again, but in a very regular pattern concentrated in a few regions. What about the past and other conditions and the speed of the harvest. Do you think that there is a risk of other productivity reductions? And if you can also talk about Mato Grosso in this context, are they doing -- is the state worse than the rest? And if so, how much worse than the average?

And about yield expectations for cotton at the current price levels that you're locking, what do you expect? And what about -- and how does this compare year-on-year with [ by 10 ]? And what about the new fertilizer purchases? What decrease are you finding in comparison with the previous cycle?

[Aurelio Pavinato, executive]

Thank you, Lucas, about the climate. Well, after Christmas, climate went back to normal. So it started raining again, as normal in Mato Grosso, Bahia, Maranhão, the entire center North region of the country. That's why the -- the crops in Bahia, Maranhão and [ Mato Grosso do Sul ], well, there, the drought was not very strong in Mato Grosso. We have already finished the soybean. So we know that there was this rupture in the soybean crop, it was below. So now we are harvesting in the Northeast, Maranhão, Bahia, and we have now harvested almost 2/3 of corn. So unless there's a climate catastrophe, everything has been adjusted.

It's not a shortage of water that we're experiencing. The soil is very moist, both in Bahia and Maranhão. We are doing a little bit of soybean replanting in Bahia, and these areas still depend on rainfall, so that we can confirm the yields. So there's still a little bit to be confirmed, and we are using an estimate. So could there be an oscillation? Yes. Yes, if the climate worsens and it stops raining. If and -- or if it rains too much, and this affects the harvest. But according to the climate predictions for March, we're back to normal with rains and everything indicates that we'll confirm the expectations for soybean.

The climate in Mato Grosso for cotton is very favorable. We planted cotton in part of Mato Grosso, so it became from second crop to crop. And all the rest of the second crop corns and soybean actually moved the head of the cycle in Mato Grosso because of the hotter climate and the drought. We ended up planting cotton earlier than usual this year. So that's why the cotton crops so far are doing very well because we planted a little before what it is expected, and the climate has been favorable. It has rained but not too much. So that's why we're feeling so optimistic with the cotton crop now on the field because the conditions are favorable, and we could actually have some positive surprises in cotton yield if the climate continues to behave, as it is behaving now.

As for the productivity and profitability of cotton, prices have been going out -- up and down between BRL 0.80 and BRL 0.85 and BRL 0.90 in -- but in spot prices, but the futures -- the futures price for the current cycle is now at [ BRL 0.83 ]. So we're talking about futures prices in this level between BRL 0.83 and BRL 0.80 and BRL 0.83 and a positive basis of BRL 0.03 to BRL 0.04. So cotton will be sold at BRL 0.86, BRL 0.87. BRL 0.88.

And at this level, with the necessary cost adjustments that we made and additional cost adjustments that are being planned we believe that -- and based on the simulations of margins for cotton at this price level, the margins will remain normal, not exceptional, but not compressed margins, as we see in the case of corn and soybean.

So this is the scenario for the 3 crops. It's looking brighter for cotton in terms of yield this year and also for prices, international prices. The curve is now reversed, and prices have been at a higher level. So our expectation is that as time progresses, we'll be able to sell even higher than the current prices, which is we're getting BRL 0.83 in New York for December 2024. This is the expectations for cotton.

Well, thanks for the crop diversification. Of course, this is a strong support that we have in reducing volatility, and this is the expectation that we have for prices and margins.

[Rodrigo Gelain, executive]

Our next question is from Pedro Fonseca, XP. Please open your microphone and ask your question, Pedro.

[Pedro Luis Fonseca, analyst]

Good morning, Pavinato, Ivo and Gelain. I'd like a follow-up on the seed business, if it's okay. I think that Pavinato mentioned during the speech that part of the decline is explained by the increase in SG&A expenses and marketing, but we also saw a decline in gross margin with an increase in cost, especially relating to internal transactions. There was a drop in the cost of products such as soybean, but can you give us a little more flavor? What explains the financials in the seed business with this decrease in gross margin?

And my second point, could you tell us a little bit more about the strategies for inputs purchases, you're still at a low level of hydrogen chemicals. What is your vision? When can we expect for you to advance in purchasing nitrogen? And what about crop protection products, especially in '24, '25, it's difficult to track this number. But based on our investigations, it seems that the industry is now understocked. So if you could give us a perspective on crop protection, cost per hectare for the '24, '25 crop year, it would be very helpful.

[Ivo Brum, executive]

Okay. Seeds, well, initially, we reduced the number of sales to verticals because this was a product sold at request. So we focused on products for the exports markets or in domestic markets, where the margins are very similar. So in this specific case, when we talk about an increase in expenses and production costs, well, the origin of the cost in seeds is the grains produced in the previous crop year, '21, '22. And in the case of soybean, the prices were traded at that time, much higher. So this is the costing base for the seeds. So there was an increase in costs.

So when you start selling, when we started selling seeds, prices were declining, and farmers, of course, put pressure on us to reduce the prices of seeds together with the prices of crop protection, et cetera. So this creates, of course, a disadvantageous scenario for the seeds because in the previous cycle, costs were higher and when you start selling costs, the prices were lower. But basically, this is what explains this increase in costs.

Well, about input purchases, when we look at the crop protection market internationally and the so-called generic or brandless products prices are an all-time low, and there was an additional reduction in relation to prices from last year. So in relation to your question, there's still room for a decline in crop protection prices. Yes, there is because there was a decrease in prices in the international market. Obviously, patented products is another story because it depends on the marketing strategies of each company, but the sector is putting pressure and demanding cost adjustments, and this is the year for that. So there will be pressure on the suppliers, so that they adjust the price of inputs. So this is what we expect. There should be an additional adjustment in prices for the next crop year.

As for fertilizers we have purchased fertilizers at opportunity prices using the down curve moment. And in nitrogen, for example, it has recovered recently, but logic points out to the fact that higher prices cannot be sustained owing to the decrease in commodity prices in international markets, not only in Brazil, margins are under pressure in all countries in the United States, et cetera, and this creates pressure on fertilizer prices. So that's why we have used opportunities to enjoy lower prices, and we look at the entire basket of fertilizers in Brazil at current prices, we're still 11% higher than historical prices at CFR prices.

So in some cheaper products such as super simple nitrogen, they bounced back, but potassium has been declining. It reached [ 280 CFR, and it's now at 290 ]. So some adjustments are still happening, especially in nitrogen. And we believe that new opportunities will crop up in the next month, especially after the planting in North America ends in April and May, and this creates a downward pressure on prices as well.

[Pedro Luis Fonseca, analyst]

Thank you very much for your answer. Very clear. Well, you have talked about the decrease in prices. Well, but since there is internal sales and sales to third parties, could you give us an order of magnitude? How much -- how much was the drop in seed prices year-on-year for third parties? I know that you don't disclose this type of information, but if you can give us any light on that?

[Ivo Brum, executive]

Well, it's difficult to give you this number because there are many different varieties. And so, to give you a number is very complex. It actually is very vague because we had recently a discussion internally about the seed business. It's very difficult to make year-on-year comparisons because prices change, so we have to compare variety by variety because the reduction was in proportion to commodities, in fact. There is an exchange between the 2, yes, in relation to the raw materials prices.

[Rodrigo Gelain, executive]

Our next question is from Thiago Duarte, BTG Pactual. You may open your microphone, Thiago.

[Thiago Duarte, analyst]

Good morning, everyone. Hello, Pavinato, Ivo and Gelain. Well, I just wanted to go back to 2 points, going back to the review in soybean yield in comparison to the review that you did in December. First of all, I want to understand -- well, it has become clear, Pavinato that, as you have explained that this -- the reduction of expectations is coming from Mato Grosso, right? But the reason for my question is it still seems, I don't know, an exaggeration based on [ Enea ] numbers, you're talking about year-on-year decrease in productivity of 15%. So -- and in relation to the project, we're talking about 12% to 13%. So could you please tell us, what are you expecting in relation to the rupture in the Mato Grosso farms in relation to the previous year. This is my first question.

And [ now the ] second question is about the carrying over of cotton stocks, the cotton that were -- was produced last year. I don't remember if in the past, you carried over so much cotton from 1 year to the other. And we know that this year, because of the land expansion and also the positive outlook, you should have a large volume of cotton being produced. So from this carried over volume from '23 to '24, how much do you expect to sell in 2024? And how much will be carried over to future years? I'm thinking now more of the capacity or to ship all of this volume that was produced this year.

[Aurelio Pavinato, executive]

Thiago, about productivity. Okay. What was the situation in Mato Grosso? In Mato Grosso, cotton farmers, we planted soybean first in September and in the first -- fortnight of October, we harvest this soybean in January to plant cotton. And the cotton that is planted in the first and second fortnight of October is harvested in February to plant corn.

So what happened in Mato Grosso this year? When did the drought hit? It started in mid-October, and it went all the way through Christmas, the second fortnight of December. It was hot and dry. You might remember the heat wave that we saw in the center north of the country. So which crops, which varieties were hardest hit. Early soybeans. The soybean that had a shorter cycle and that was going to be harvested in January. So it completed the cycle with no water.

By Christmas, it was now maturing without receiving adequate rain. So the rupture in productivity for cotton producers was 2x higher than the loss of productivity for corn producers. And this explains why in Mato Grosso, we produce 1/3 of the soybeans. And the average in Mato Grosso was 20%. So this year, cotton producers in Mato Grosso, and you can talk to any of our neighbors, and you can confirm this, so there was a rupture that was more pronounced, especially if you plant very early soybean with the expectation to plant cotton.

Next in relation to the average of the states, [ there are ] regions in Mato Grosso that don't plant cotton, and we also held on a little bit and planted a little bit later. And in some farms, we are close to expectations, in others, we had losses of 40%. So this is the rationale that explains it. We had losses of 12% to 13% that were concentrated in Mato Grosso, but in fact, it was much more than that. And that's why that the balance to be harvested will enable us to confirm the productivity that we are estimating.

About the carryover of cotton, in the second half last year, well, in fact, last year, we were looking at the numbers in Brazil last year had an export in agriculture, export in agriculture increased 180 -- from 180 million to 220 million tonnes, and there is a product that competes with cotton, which is sugar that is shipped in containers. So there was a dispute for ships. It was not -- the difficulty in shipping out cotton from the farms, no, it was at the ports that we had delays and that was the main reason for the delay in deliveries of cotton in 2023. So we ended up delivering 40,000 tonnes less than estimated.

Now Brazil has become a cotton exporter. In the 12 months of the year, we export throughout those 12 months. So we're going to divide our output in those 12 months. And in this case, in 2023, we were below the exports in the second half. So the balance that remained from last year is now being shipped out. And we expect that in the new cycle in the new season, that will be available in August and will start being processed in July, and then it's going to be processed, classified, and [ will be ] available for export in July. So up in August, in fact, so up to July, we hope to ship all of this volume that remained from last year. And we are implementing an action plan to find a way of exporting even more volume in the second half. And like this, we'll maintain our exports in this proportion of [ 1:12 per month ]. This is what we expect for cotton.

[Thiago Duarte, analyst]

Very clear, Pavinato. But do you expect that you can go back to normal this year? Or do you believe -- the Brazilian production volume of commodities that will be exported this year, unfortunately, will be much lower than last year, why?

[Aurelio Pavinato, executive]

Because there is a reduction in soybean production and also in corn that's very expressive -- reduction that's very expressive. And all other products that depend on climate, while we're still waiting to see the numbers on sugar, but those are the 2 major volumes, soybean and corn. And both domestic freights are now being negotiated at lower prices than 1 year ago. So there's less demand for transport.

In the specific case of cotton, all shipping companies are taking several actions to increase shipping capacity at the port. And then, we need to wait and see the flow of ships. This is going to be the major -- major factor. Considering that the textile industry in China is now resuming its occupation levels, as in the past and textile demand in Europe and the United States continues to go on strong, so there was an expectation that would be a decrease, but it actually didn't turn out to be the true -- the truth.

So this created a pickup in prices. So we had also the war along the way, the Israeli -- Israel and the West Bank. And this, of course, was a problem and the Gaza Strip war, in fact, and the flow of ships, of course, could be a variable to watch. But considering that there will be a normal availability of ships, we believe that will be go back -- we will go back to normal, and we will ship [ 1:12s ] of our production every month.

[Rodrigo Gelain, executive]

Our next question is from Matheus, UBS.

[Matheus Enfeldt, analyst]

Pavinato, Ivo and Gelain, thank you for entertaining our questions. First of all, I would like to discuss the capital allocation with the potential resumption of growth in '24, '25. You also engaged in a buyback program, but maybe for '24 and '25, there will be a stronger focus on investments, so that we can go back to a growth cycle. So with maybe a smaller direct return to shareholders. So what's your expectations in relation to growth? I believe that new opportunities will appear in the near future, but are you still focusing on leases?

And what about the geography -- in the last few years, there was a concentration in Mato Grosso, where more opportunities will appear since this was the hardest hit program, but are you going to try to increase geographical diversification? Or will there be more concentration in Mato Grosso [ for '25 ], you mentioned that cotton margins will be more attractive. Do you think that perhaps you will increase the share of cotton in your portfolio in '24/'25?

[Aurelio Pavinato, executive]

Matheus, we operate in the Brazilian Cerrado. Historically, this is one of the most stable regions in the world in terms of climate. We have this proven by data. However, world climate is becoming more volatile. So expansion in regions, diversification makes all the sense, as a way of mitigating climate change. So our motivation in expanding into other regions is now greater than it was 5 years ago.

In the Brazilian Cerrado, all regions are good for us and historical data shows this. So whether we expand in Mato Grosso or Bahia or Maranhão, this will depend on opportunities that emerge. And we haven't made any decisions, in fact. Well, we had a historical drought in Mato Grosso, but this is the most stable state in terms of climate. So we don't really have any restrictions in relation to Mato Grosso. And we lost in soybean, but our cotton is looking great. And part of the losses we had in soybeans will be offset by the increase in cotton productivity. That's one of the advantages of having 2 crops in Mato Grosso, it's a great advantage, in fact. So this is the scenario.

Now as I said it really makes sense to expand into other regions as climate volatility rises. The buyback program, well, those were programs that added value to shareholders. And -- and now with more opportunities for growth, it's only natural that you will direct your investment to what gives you greater return in the medium term for the shareholders that is. And we are going to plant as much cotton as possible with the existing infrastructure that we have.

When you lease a farm, depending on the farm, it's not always prepared for cotton. So we'll have to take this into account and analyze if expansion of cotton should be done in new farms or if we should use our existing farms. We're still -- we're investing in irrigation, for example, in a farm in Bahia, we have now added [indiscernible] in 3,113 hectares. And there -- today, we only plant soybeans there, but we're going to be able to plant soybeans and cotton in the same land. So we have this crop portfolio. Now we are finishing our agriculture crop planning and then we'll decide the size for each crop in our farms.

[Rodrigo Gelain, executive]

The next question is from Laura Hirata, Santander Brasil. You may open your -- you may open your camera for questions. I think we have some technical glitch here with Laura. So I will just skip Laura, and if she can get connected, we'll have her again. So now Julia Rizzo from Morgan Stanley. Please open your microphone. We're looking forward to your question.

[Julia Rizzo, analyst]

Can you hear me? I want to follow up one of the questions that my colleagues asked that it's not so clear for me. In relation to the outlook, '24, '25 in September, the cost -- well, you are now closed in crop protection basically. And I would like to know about this relationship. You said that fertilizer prices are being traded 11% higher than historical levels, but that doesn't really tell me much about the prices you have closed. Can we expect a better, a better relationship? Or is there an outlook or an improvement perspective? And what about hedging? Have you locked prices for the '24, '25 cycle since most of your fertilizer has already been purchased.

[Ivo Brum, executive]

Thank you, Julia, for the question. Yes, we have unlocked hedging for next year. We're just getting started, and we are defining the mandate, but we haven't closed anything yet.

As for the costing, as we mentioned, we have made some acquisitions because prices were below current levels, and the relationship with the historical costs were really very appealing. But it really -- we have to see what the mix will be. So if we are increasing cotton, clearly, cotton has a superior margin in relation to the other crops. This will be an impact in our hedging. And if the prices are low, it's natural that we should expect a reduction in tech and fertilizer prices to make corn viable, as a crop because today, it only gives us a contribution margin.

And this is what we're going to work on the next 5 months, so that we can deliver results for 2025, and in line with our historical results. This is our objective today. We are going to make an analysis of the technology packages, and this is what we're going to be dedicated in doing in the next month. But it's difficult to -- but what about the ratio of the purchase fertilizer package price and the average commodity prices ratio. I think the soybeans are in an adequate level, cotton as well, but corn is much -- it's really lagging behind. So we have to, I don't know, either use seeds with lower potential. There are several things that need to be analyzed by our agricultural planting team.

But with this exchange ratio between fertilizer and commodity prices, I think that in cotton and soybean, there's good alignment. So we can resume our historical margins. It wouldn't come as a surprise. So a little above '24 -- '23, '24 because we're a little below historical prices. Yes, 2023 was close to historical levels with 13% in net margin, EBITDA of 37%. It's very much in line with our expectations. So last -- next year, we can do this [ feet ] again with the same levels, and this would be very positive.

[Julia Rizzo, analyst]

Okay. Now I have a question about the carrying over of cotton because it's a large volume, 226,000 tonnes. So can I use the gross margin of the quarter to ensure a result of BRL 1 billion of the -- coming from cotton?

[Aurelio Pavinato, executive]

Yes. It makes sense, your calculation because the cotton has been carried over from '23 to '24, but I cannot say that the cost will be the same because it depends on the farm that's delivering, and prices depend on the quality of cotton. So I think it's going to be a little below [ BRL 4,500 ] per ton because there's the issue of cotton quality in the last quarter. We harvested cotton with great quality. So there could be a small reduction, but it should be around that [ 4, 4.5, I think 1,000 per tonne ]. It should be -- this is very adequate. But we know that December, this is the period for harvesting the best cotton and then also for direct sales.

[Julia Rizzo, analyst]

[indiscernible]. And what about your perspective for the United States in with the -- in relation to the new planting season, what do you think will happen in terms of acreage, corn and soybean? What about the price conditions, I would love to hear your views?

[Aurelio Pavinato, executive]

Well, the soybean, corn ratio in the United States, well, American farmers have insurance, which works very well. So what is the first milestone that they have, they have the soybean prices and cotton for the futures crop year in October that were practiced in the month of February. And in February, the ratio between soybean and cotton was 2.6%.

As for the ratio between -- this ratio is above [ 2.4 ]. Farmers have an incentive to plant more soybean. When it's lower, they have an incentive to plant more corn. So that's why the first version of USDA data shows an outlook for growth of soybean areas, around 3 million acres and a reduction in corn. At the same time, in this scenario with lower prices, maybe the total acreage will decrease. It has happened in the past. Today, the United States are using its full potential of planting it. And it's no surprise for us that in a condition of tighter margins, as we see for American farmers, maybe they will reduce their acreage or replace some of the crops.

But the scenario today is that they're going to plant more soybean and less corn because the price of corn dropped before soybean prices have just decreased. So when we look at the futures for next year, in this month, there has been an adjustment already of [ 2.4 ] with future prices of corn of [ 4.7.8 ] and dollar per -- dollars per bushel and soybeans of [ 11.5 ]. So and which means [ 2.4 ] in the end. But we believe there will be more soybean on the fields, and this has already been reflected on prices.

[Rodrigo Gelain, executive]

So let's go back to Laura Hirata, Santander. Could you please open your microphone and question and ask your question, please.

[Laura Hirata, analyst]

Can you hear me?

[Rodrigo Gelain, executive]

Yes. We can.

[Laura Hirata, analyst]

Thank you for the Q&A. My apologies. I would like to talk a little bit about the crop planning for '24, '25, especially in terms of crop diversification. Could you give us a follow-up in relation to costs, freight costs? And what's your outlook in relation of a possible container shortage. Is this in your radar? Did you map this out? What is your opinion about this risk? This is what I have for today.

[Aurelio Pavinato, executive]

Well, starting with the containers and cotton exports, Laura, as I said, we cannot have greater control and depending on the flow of ships. Of course, this depends on the imports that Brazil makes and also competition with other products. And this is what increases availability of containers. What happened this year was not actually a problem with containers, but rather with the ships. There were many delays. And instead of 1 week, they took them 2 weeks to arrive and this is what happened.

And this is also a problem related to the wars, and the different deviations or that ships need to make. And this, of course, takes time. So a trip that should take 30 days, last 40 days. And this, of course, reduces availability of ships. So I have nothing really more to add about this topic. Anything else?

[Ivo Brum, executive]

No, our crop planning program, well, it's around 680,000 hectares -- 118,000 hectares. This is what we are using. So we increased the cotton area last year because of the better margins that we anticipated. And this year, we are going to make the same type of analysis. Always doing crop rotation, but there could be some adjustments, so that we can provide maximum returns to our investors. But the agriculture planning team is on the field, there are several aspects to be discussed. Sometimes there are investments needed, and we need to discuss this in great detail. And by the end -- by the middle of the year, we'll have everything aligned.

[Rodrigo Gelain, executive]

We have one more question from [indiscernible]. She's from Bloomberg. So I'll read it to you. Hello, here's [indiscernible] from Bloomberg. So I would like to ask a follow-up on La Nina. Why is it good for the Brazilian Cerrado, and therefore, for the company?

[Aurelio Pavinato, executive]

Good morning, [indiscernible]. The La Nina years, well, the -- will have a certain historical pattern. There is a shortage of rain in the south of Brazil and Argentina. And with this, there are losses in the crops of those 2 regions. And with this, prices go up. This is the upside that we have seen in '21, '22. On the other hand, the center north of Brazil and specifically the Northeast of Brazil experiences heavy rains. In Mato Grosso, the effect of El Nino and La Nina were not as intense. But this year, we saw El Nino leading to a drought in Mato Grosso. But with La Nina, we would expect normal rainfall in Mato Grosso.

In Bahia and Maranhão, La Nina is good for agriculture, which means we're going to have a full harvest with a full crop, and this gives us some potential for price recovery. This is actually a summary of the effects of climate over our agricultural production and over the market.

[Rodrigo Gelain, executive]

Thank you very much, Pavinato. If we have no further questions, we are now closing this video conference call on the fourth quarter 2023. Well, our Investor Relations Department will be happy to answer any of your questions. Thank you very much for participating, and have a great day.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]