Brasilagro Brazilian Agric Real Estate Co Sponsored ADR (Brazil) (NYSE:LND) Q2 2023 Earnings Call Transcript

Brasilagro Brazilian Agric Real Estate Co Sponsored ADR (Brazil) (NYSE:LND) Q2 2023 Earnings Call Transcript February 8, 2023

Ana Ribeiro: Good afternoon to all. We have a lot of people connected to hear our results. My name is Ana Ribeiro, Head of Investor Relations at BrasilAgro. We’re here to talk about the earnings in Q1, the harvest, our financial statements follow the harvest year to minimize the impacts of seasonality, planting and harvesting. So here we will be talking about Q2 2023 and first six months of the same period. For those who are hearing in English, the presentation is available in chat. So the presentation is available in the chat for those who are following us in English. Today, we have our CEO, Andre Guillaumon; and Gustavo Lopez, our CFO, to explain to you a little of what happened in the last few months and talk about perspectives for the future. Thank you. I’d like to pass the floor to Andre. Andre, you have the floor.

Andre Guillaumon: Thank you, Ana Ribeiro. I’d like to thank you all for participating. I’ll comment the earnings, bringing the company’s numbers, the expectations. Ana used a very wise word seasonality. Seasonality is a characteristic that is inherent to agro business. And we will explain some important numbers and some of these things have to do with seasonality and also the decision to sell. And I hope that at the end of the call, we will have questions. We continue believing a lot in the company’s results in the company’s business. We will have a quarter with interesting points about sugarcane. But surely we’ll see the meaning of these numbers. Another challenge, companies like us who have a double strategy, operational results plus sale of farms, real estate happens, the sale of real estate.

It happened. We made a small sale, and of course, the objective is to really take the decision to sell at a time when we have a good liquidity in the market. Let’s see the highlights. We need a lot of time for the questions. Financial highlights. We have net revenue R$484 million, net income R$29 million, adjusted EBITDA R$124 million. We had a sale, a small sale, approximately 900 hectares. A sale in Rio do Meio, sold for R$62.4 million, showing once again, reminding you, this asset came from the purchase we made. We sold part of this land previously. And once again, we have a good result selling another part. Operational highlights. In the semester, we finished planting grains. Here we have cotton also. So everything that was planted in the semester until December 30.

We still have some grains — some grain, the end of the planting in Paraguay and which is not included in this number, but these are important highlights. A little later, we will talk about what is happening in this harvest. Next, when we talk about what we expect for this year and the next years, the earnings, we have important sustainability in commodities when we talk about soybean, we’re talking about a super harvest more than 150 million tons in Brazil. But when we look at international levels, we have 4.5 million tons in inventory in the world. We have a super harvest. We have also Argentina with an important drop in the harvest. And this is positioning, this is affecting Chicago in an aggressive way. Brazil has a record of a 100, a little over 150 million tons.

And every day, the number surprises yes, but the number was around 430 million tons, 435 million tons. Someone said, I’m speaking a little low. When we looked at the other commodities, we have a drop, a small drop in the price of cotton. This is linked to inflation, to restrictions due to the Coronavirus. So it’s a commodity that is going like we always say it is — has a stable price. So also we have the China effect and ethanol. Ethanol is a highlight. We will talk a lot about this here. We have many effects, but especially 10 taxation and talking about taxes. No one likes to talk about taxes. Our tax burden in Brazil is going down. But this brings competitiveness for non-fossil fuels with a carbon footprint, which is low. So in fact, if we are concerned with the climate around the world, so this is one of the points that will bring transformation.

Here we show the behavior of the curve. Next, when we — it’s important when we talk about seasonality. We’re in a harvest where we had a cost of planting. I don’t remember such high prices for planting during my life. All the farmers paid a premium in to be able to plant the purchase of fertilizer during last year for this harvest now in progress and we begin to see signs of fertilizer prices going back to historical levels. So we saw a math going from 400 to 1,200. The company really bought at 950. But when we look at chloride, we bought a little before the war. I already mentioned this. And urea, seasonality. What I would like to highlight a graph that is here where we see the numbers, the number of tons per bag. When you have stable prices for soybean, we see this relationship between product and fertilizer, going back to levels that are close to historical levels.

And this will give us a recovery in the margins for farmers bringing also liquidity. And we will be talking more about this. Well, just a little information here just to fertilizer was a concern. We have bought everything and we’re now buying some fertilizers that we believe are strategic and we have seen some changes in the prices. And we’d like to remind you, when we decide to buy fertilizer, we look at contribution margin. So we always make the decision based on how much we will sell. So this is a new slide that we’re including showing once again the company’s concern with its business and also sustainability. As I always said, sustainability is in the company’s DNA. A company that developed — develops land in frontier regions and also is concerned about social issues.

We’re the first company to be part of the Novo Mercado in the SEC and I will show you highlights for each one of these lines. The highlights for harvest 2021, 2022, 2023 in the environment, we determined to do the first report, the inventory of greenhouse effect gases. This is fundamental for us to measure to begin working on this and to be more efficient as the years go by. In the social — concerning social issues with our institute, we have a summary in the institute; we’re closing the semester here. In the institute, our projects are annual projects. So we have this highlight, the institute led by Ana Paula and her team, Tanya and Carla. We help more than 18,000 people. Reminding you that there is a focus on education: education, building schools, preparing teachers in the regions where we are working.

In governance, not only due to new regulations from the SEC, in Brazil, the CVM. We had the approval of transactions with related parties. This also is very good for the investors. Also we have an audit committee now and the maintenance of the tax committee. On the same page, what do we have? We have the metrics. We hired an outside company that does this — does these reports on materiality. Eight points are analyzed in this metrics. Eight points beginning with health and in the workplace develop — people development also greenhouse effect gases, climate changes, compliance, management of water resources, relationship with communities. So what changed from the previous metrics to the current metrics? It included the SaaS methodology. So a new balance, some factors were included in the metrics.

One thing that is new innovation and technology productivity we already had. Now it is more important greenhouse effect gases relationship with communities in biodiversity. So what do we do with this? We bring this inside the company and we work with a company’s management and also civil society. We work on an action plan. We work on an action plan, and then we will have new surveys and make the necessary changes. Well, here it’s important to say that we’re preparing the company more and more. We will show the growth, but the company this year is investing more than R$85 million. And here we separated some Groups. I’d like to highlight when we talk about technology, we had projects in connectivity and important projects for monitoring and mapping in a just in time way.

Also in technology, bio inputs in infrastructure, we are building — we are now an important producer of soybean. We had a very small production of seeds for our units. We were a small producer of seeds. We’re expanding this. We want to be able to supply seeds that are our own seeds certifying this. Initially, we want to have a production unit for seeds for our needs. And this one has to do with the following. When we talked about irrigation, this is in a unit where we have an irrigation project that allows us to improve the production of seeds. Some that we have some seeds that we use are difficult to replicate. So we’re checking all the units where we have irrigation to produce seeds. I’d like to call your attention. The company is beginning to have a more integrated vision, looking at where we can be more efficient within the chain and where we have value we’re analyzing and working on this.

The company also most of these R$85 million in investments are being invested in transformation during the semester, we increased land. We acquired Panamby farm in a partnership also Regalito, we acquired in Mato Grosso, Panamby and Fazenda Regalito and São Félix do Xingu and São Domingos farm new region in the West of Mato Grosso. So these are 15,000 hectares that are now in operation that we transformed. And we’d like to remind you, all these units will plant the second crop. So 15,000 hectares is a physical area. A little over 15,000, almost 16,000, 17,000 hectares are being transformed. Well, I believe that here we have a highlight in spite of being a company that sells acids. When we look at the graph on the left, we went from 134,000 hectares to 170,000 hectares in the last five years.

So this is a highlight the company had the capacity to add a little more than 22,000 useful hectares. When we add the growth of area even with sale, we saw the company’s capacity to always increase its capacity to generate value to investors. And in the pie charts we have here on the right, the breakdown of crops, the company is more and more diversified now due to volatility in prices in commodities. The graph on the right shows areas that that are ours, areas that are leased to third parties. So our objective, I already mentioned this many times, leasing must mitigate volatility. Our own land reduces the need for captive. So it’s a win-win situation. Well, here everyone’s interested to see what happened with sugarcane and the harvest. The harvest, a 100% of the planting is over.

We finished planting within the windows that we call ideal planting windows in Brazil and in Paraguay. We began the harvest. We began the harvest for soybean, especially in Mato Grosso, a little in Xingu. We have been harvesting since January 11 with very good productivity in a certain way. The company is not different from Brazil in the last few months — in the last five weeks, all the production units are working and we saw this in many regions in soybean has been spectacular. So we have a problem in the South. We don’t have production units in the South where there are problems. And as I always say, there we still have some work to do, but we can see that the harvest will be very good within the company. Rainfall has been good. We have seen rain that was present in the central part of Brazil and also in the North.

Photo by Zac Gudakov on Unsplash

And we see La Nina losing strength. The ideal world for farmers for those who don’t know is to plant with La Nina and harvest during El Nino. So La Nina anticipates rain and El Nino does the opposite. So we’re — we have a more neutral situation, which will certainly make the rainfall continue and this will affect productivity in the second crop and will also help a lot in sugarcane. Next, please. Well, here we begin to see some more color. Fundamentally, let me see if I can use the mouse. Beginning with tons produced, we have a drop. We had foreseen in our release, we had foreseen this drop and we had an impact, especially you who follow us. Some of you follow this sugarcane crops. We had a drop in the center in South and also in Maringá.

Maringá in the North, maybe rainfall, and also a fire that we had during the harvest. When you have a fire, you don’t lose sugarcane, but you have to anticipate the burned sugarcane. You anticipate maybe a sugarcane that was going to grow during 12 months. You have to anticipate, for example, and you have to harvest cane with eight months. This has an important impact in productivity and also an important impact in the sugar content ATR. The great highlight later on we will say more. What I’d like to highlight in this slide, in this drop in productivity later on we’ll have a vision looking at each year, and I say 2021 for every farmer was a spectacular year. We had a combination of productivity in the case of sugarcane and also high prices, a very positive price for the sugarcane sector.

When we look at the harvest drop here, well, from 132 to 124. But when we look at every, at six months, we see a drop of from 145 to 140. So this is the impact. Later on we will explain in detail. But first, we’re in the — we have six months already. As we said, two-thirds of the harvest was already harvested and we have the sale of the previous harvest. When we look at six months, 2023, we have a profit of R$29 million and it’s important to tell you about expectation the company had concerning this number. When we compare with the same period last year, we see a large difference. But in terms of inventory, we had soybean 35,000 tons, 620,000 tons of corn. This inventory was sold at the soybean with the same price, very similar prices to the previous year.

In the case of corn, a little higher than we had reported in the previous year. And we saw a contribution margin that was a little lower due to the increase in the prices of fertilizer, especially in the second crop. And we understood this expectation for a better sale, when you would represent R$90 million. And in fact, we were able to carry out our plan. When we compare this with the previous year, we add 50,000 tons extra more in soybean. We have to remember that the costs that we had R$3,600 per hectare prices, the price of soybean bags went to R$160. We had a result of R$90 million more in the six months of the previous year. So there’s a difference between what we estimated and the operational EBITDA. We had a difference in sugarcane.

In sugarcane, Andre said we had already foreseen 100,000 tons less in production. This had an impact of R$50 million when we compared with the same harvest previous year. We knew R$25 million actually, R$15 million was the cost. And we had a higher price in diesel oil from R $4.80 to R$6.60. And the impact on each ton that is harvested two to three liters. So it’s — this is a very relevant cost and we had calculated R$50 million. Also the price and the effect in September, October, November, which had a strong impact on the semester’s results, especially the last semester. So when we look at the revenue R$455 million, when we compare this with the previous year, and here we have R$80 million in volume and the difference comes from sugarcane, the less volume.

We know we have a combination of the sale of real estate last year. In the six months, we had recorded part of the sale of a farm. We have another part that will be recorded in the next year. And we had the sale of part of a farm in Rio do Meio worth R$316,000. So we hope to continue this. When we look at the adjusted EBITDA, we see everything that we expected due to the impact of price and lower volume, which was estimated and we will explain in detail, but I’d like to say once again, and I’ve said this constantly, we’re going back to historical margins, very attractive. Last year, we had a margin of R$10,000 per hectare. Now we’re working with R$4.25. So it’s important to have this vision. When you look at every six months, you see the impact.

When you have a drop in price that happened last year, we — so we had — you have these — this effect and this is the impact that we will analyze in detail. Well, everyone knows about this. This is the data for cattle. As I always say this, it’s — we use cattle raising while we transform the land. And it’s a transition phase. So we have here the number of heads of cattle. We have been maintaining. Some of this area will be transformed in the next few years to arable land. And we have GMD. Here as you can see, I’d like to see that the highest GMD is in December, January, February, and March. So when we look at the semester, the semester includes one month of GMD. This is average daily gain in weight during the semester, the other semester it’s a little lower.

Here too we had late rainfall in Paraguay. So in Paraguay, we had a lower GMD in December and January. Today everything is back to normal. Rainfall has gone back to normal. So this is a picture of the semester. Well, talking about how the company is positioning itself. Let’s look at 2022, 2023. The company has 65% — 68% of the soybean sold at a price of R$14.62. I’d like to remind you, we began to sell products with soybean at R$12.13, R$13.20, R$13.70. So today we have an exchange rate, as I mentioned around R$5.52. So our exchange rate R$5.52, the other crops we’re making progress less in corn. Most of this corn is second crop. In Mato Grosso cotton, the opposite cotton is a crop that you sell more rapidly and you have interesting operations in the beginning.

We have sold more than 60% of cotton at the price of R$0.87, R$0.88 per pound. And here we sold at a time of volatility in with the exchange rate and the months before the elections in Brazil. We sold at R$5.70 per dollar. Unfortunately, Brazil is not a recurring model for sugarcane, but we’re hedging part of the production, especially in Maringá entering the harvest, we did hedging of 34% and the initial graph today, ethanol is being sold for 2,600 per cubic meters and this is the price we used. Well, the next slide. Now I’d like to pass the floor to Gustavo, our CFO, and he will talk about the numbers.

Gustavo Lopez: Thank you, Andre. Welcome to our conference call here. Let’s begin first on lower volume, which was estimated and especially due to the fire. So in the end, this had an effect of R$360 million. So in the adjusted amount, we see a combination of two activities. The sale of farms and operations, R$124 million, last year R$600 million. The difference is R$250 million due to the sale of farms. And the other difference, R$180 million is due to the price of sugarcane and R$50 million, the higher costs, especially in sugarcane. On the next page, we prepared, these are the three main activities. This is some detail about what I mentioned. We knew that this year we would have 35,000 tons of soybean last year, 83,000 tons.

Last year, we had an EBITDA to recognize during this semester, this year we anticipated the sale of soybean. The prices that we sold for were very similar. The cost when we look at Reais per ton, the cost was higher and the margin began to be adjusted at 30%. Last year, we had an extraordinary year, 50% margin for grains, and 65% margin for sugarcane. But when we compare with the last year, especially when we look at the cost, chemicals, fertilizers, and diesel oil, as I mentioned for sugarcane, this affected the contribution margin. When we look at corn in the middle 114,000 tons, and we sold almost all the inventory. The prices were a little higher, 7% higher, but the cost also went up. So here we have the price of fertilizer, and this is generated a lower contribution margin per ton, 30% margin.

Sugarcane on the right, we’re looking at the semester, we see that the price of sugarcane began very high, and then prices began to drop with floor in September, then going up in October, November. But during the 12 months, we saw that the price is still high. Prices are still high. We have a big — large difference in this semester. Last year, R$200 per ton, and I remember that 60% of our production, we have a contract with a premium of 20% and this leveraged even more this price showed during the — in the — in these six months, we see the price per ton and also the ATR, which Andre showed and so the margin, when we look at the full harvest, the margin is 30%, 35%. But we highlight last year when we had R$230 million, we had a margin that we had never seen before.

And when we look at R$118 million in the same amount of land, we see that there is a margin of R$4,500, R$5,000 per hectare still above if we consider that EBITDA R$8,000 extra because of depreciation. But if we consider this, we see that margins are still high. Here we made all the adjustments eliminating all biological aspects, and we see sugarcane represents between 35%, 40% grains a little more. Here as I said, in the next six months, we will have the total harvest for soybean 150,000 tons of corn and all this will be in the result and will be represented in a bit. On the next slide, we will see debt. We said that we have a company, we have — we are not very leveraged when we look at receivables. So we don’t have high leverage R$550 million without considering Alto Taquari farm, which we will deliver.

The farm we will transfer because it was sold and we will be receiving the payment next year. So here this is our debt R$560 million. In the last quarter’s we took out a loan with an interest rate of 10.5%. This allows us to continue to have a debt that is low; the interest rate is lower than the CDI rate. And we’re working with a debt that is a little longer. We did this to buy some inputs, especially for the next harvest. And we have a cash R$300 million in cash in adjusted EBITDA, a net debt — net adjusted debt is very low. So in terms of debt, the company is very healthy. And now the evolution of our shares, share price. Here as always, we believe we have a great opportunity to have a higher price for our shares. We have prompt — we know that this was foreseen as we mentioned due to the price of commodities, especially sugarcane, we don’t control the prices.

We are always doing our best to guarantee the productivity, but still we understand that the company has a great potential selling farms, having good harvests and especially the company will also continue to transform cattle raising land into farmland. And we understand that there are excellent opportunities for investments. Thank you. And now we’d like to begin the Q&A session.

A – Ana Ribeiro: Thank you, Andre. Thank you, Gustavo. We have a few questions. But first we will hear Thiago Duarte from BTG.

Thiago Duarte: Good afternoon. Can you hear me?

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Q&A Session

Gustavo Lopez: Yes. We can hear you very well.

Thiago Duarte: Thank you, Gustavo. Good afternoon, Andre, Gustavo. Two questions. The first involving the results from the sugarcane operation. You talked a lot about the price of sugarcane, the ATR ethanol. Yes, you gave us good information on Slide 13 — Slide 12 or 13 about the gross results. But when we look at the results in the quarter — when we look at the quarter, what really hurt more than price was the cost during the quarter with the strong drop in productivity and relevance increase in the price unit price. So does this make sense? The cost was much higher than the average cost of the semester as you show, but more than this, I’d like to understand. First of all, do you believe that the cost per hectare that you projected for this harvest 2022, 2023 of 10,300, does this still make sense in spite of the result of this semester?

And, how much do you believe there will be a drop in the price of cost when we believe productivity will increase in your region next year? So I’d like to know about this. And the second question. Andre, in one of his comments to the press yesterday night, Andre was very optimistic in relation to the sale of land. So if you could give us more details where you see opportunities to sell farmland. I believe that there are more opportunities to sell land than to buy land.

Andre Guillaumon: Thank you, Thiago. Very good questions. Gustavo, would you like to begin with the cost allocation and the impact due to the drop? Then I can talk about the cost in the future and sale of land.

Gustavo Lopez: Thank you, Thiago. In fact, yes. If we look on Slide 13, we will see that we have R$50 million in higher costs. Higher costs equivalent to R$50 million in Reais this represents 45%. This is what we estimated in price increase, the price of diesel oil, the impact of fertilizer prices. What you said is true. What happened in the last quarter, the area that suffered the fire that was burned? We prepared strategies to avoid having impact in the next harvest. So we bought some inputs. We began to use some fertilizers. And when you look at the last quarter, yes, there is a great impact. Now we have to understand that we have a higher cost. When you have 200,000 tons less, the price per ton also goes up. So this increase is that’s why it’s this high.

So in fact, for next year, we want to avoid this impact next year. We want to maintain our revenue and we understand that now we have to begin looking at costs. There’s news about a drop in the price of diesel oil. This has a great impact. There will be a drop in diesel oil. So we have to revisit our costs.

Andre Guillaumon: Thank you, Gustavo. Supplementing this issue of costs. Gustavo explained well. Thiago, we begin to see prices. Recently there was news about a lower price of diesel oil. This has a great impact. I was talking to investors and I made a calculation in the soybean harvest you use 12 liters per hectare diesel oil. In sugarcane, you spend 170 liters of diesel oil in the harvest. So there is a great difference. So when we look at our forecast, we saw an increase in the use of diesel oil — in the price of diesel oil. So when we look at 2021 diesel oil used to cost R$3.80 and today it’s twice R$6.80 per liter. So it’s twice the price with this impact. Well, second question. When we talk about land, sale of land, purchase of land, there’s an interesting thermometer.