Q4 2012 Brasilagro Brazilian Agricultural Real Estate Company Earnings Conference Call (English)

Sep 06, 2012 AM EDT
AGRO3.SA - Brasilagro Companhia Brasileira de Propriedades Agricolas
Q4 2012 Brasilagro Brazilian Agricultural Real Estate Company Earnings Conference Call (English)
Sep 06, 2012 / 06:00PM GMT 

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Corporate Participants
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   *  Julio Toledo Piza
      Brasilagro - CEO

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Conference Call Participants
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   *  Pedro Richards
      Raymond James - Analyst
   *  Pedro Herrera
      HSBC - Analyst
   *  Rodrigo Nuguburu
      Morgan Stanley - Analyst

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Presentation
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Operator   [1]
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 Good afternoon, welcome everyone to Brasilagro's Fourth Quarter 2012 Results Conference Call. Today's live webcast and presentation may be accessed through Brasilagro's website at www.brasil-agro.com.

 (Operator instructions)

 Before proceeding, let me mention that forward looking statements are based on the beliefs and assumptions of Brasilagro management and on information currently available to the company. They involve risks and uncertainties because they relate to future events and therefore depend on circumstances that may or may not occur. Investors should understand that conditions related to the macroeconomic scenario industry and other factors could also cause results to differ materially from those expressed in such forward looking statements.

 Now, I'll turn the conference over to Mr. Julio Toledo Piza, Chief Executive Officer. Sir, you may begin your conference.

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 Julio Toledo Piza,  Brasilagro - CEO   [2]
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 Thank you. Welcome everyone to Brasilagro's fourth quarter results conference call. Let's pick up by going to page three in our presentation the highlight [career], net revenue is over BRL156 million, adjusted EBITDA BRL9.2 million, sale from [Pedro farm] at 153% appreciation over acquisition price. Acquisition of (inaudible) also over BRL30 million in long term financing from constitutional funds in Brazil and also something that was in (inaudible) late relating to the liquidity of our shares, some work we've been doing on that.

 So, to start with, as always, let's find out a few macroeconomic points or context. So, on page three we have soybean prices and this is reals per bag, July 13 at [Paranagua Fort] in Brazil. And of course it's been going up, it's [consumable] at high volatility. It also has been going up a lot and then, of course, create a very positive scenario for the company for next year. That was a good thing, but also create a series of challenges in terms of how to manage derivatives and the financial impact of those.

 And we're going to be discussing that later on in more detail, but it's been quite interesting what's happened to soybean prices, even though future prices are (inaudible) there is a [thick] downwards inclination on the curve, nevertheless prices for next year are quite interesting. And also, quite interesting to notice that as always fertilizer prices are highly correlated to that.

 So we've maintained throughout this year, also a significant increase in fertilizer prices as well, and also that poses an interesting challenges and also opportunities for the company as we manage our costs of goods sold for next year.

 Next page, always like to show how our land prices in Brazil are evolving and of course we're using public information by S&P and it shows that nonetheless six - five, six years land prices in Brazil have consistently gone up and this is basically because better improving cash flow per hectare for Brazilian farmers. Looks like [teening] does higher farming prices.

 Also, interesting that it's very hard to know whether [good] prices have been incorporated fully into formal evaluations. One could argue that we still need a few more months than - or at least a full year to understand what it's going to be the full impact of this new level of soybean prices in farmers in Brazil.

 So this is the context which is extremely positive, yet poses some challenges in how to manage the company. But overall, very positive environment for us.

 So, when we look into this year, so Brasilagro, I think it's important to look into three different angles or dimensions so we can better understand all the results of the company. The first dimension proposes to look at it from a real estate perspective. So on page five, that's our portfolio and we put in here the [realized] valuation (inaudible) in December 2010 and we're quite confident today those numbers are significantly higher.

 But on - when we look at portfolio, not only of course we got more valuable because of land prices in general because it's much more developed today as it was before, but also you start to see some sales, so we already have two sales there. One of them [San Pedro] what happened this year. So from a real estate perspective, I believe it's been a very good year. We've sold [on farm], 153% appreciation, delivering over BRL13 million - almost BRL13 million and results already and actually is going to be more than that over time because of accounting principles and how you account for that. Going to be more than BRL13 million over time, but BRL13 million has already been accounted for in our results for this year. So it's pretty good result and of course it supports company's strategy and how we are [dealing with our stateside].

 Also, we bought a 10% stake that [miada] had on our Jatoba farm and also a 35% stake we had in the entity that operates the farm. And also [price] is pretty important it is a very safe acquisition from a regulatory perspective, also we bought it at a very [decent] price below the (inaudible) and also simplified our - all the process on how to run the farm, had you had a separate book, separate decisions was a much more complex process. So by having everything individual and (inaudible) and an interest in price and process your total portfolio of the company, but also simplify the way you manage the farm and speed up and probably you'll speed up the development of this farm going forward. It was a pretty good year for us in that sense as well.

 So, on the real estate side, it's the first angle I'd like to propose for us to look at, I think it's been a good year.

 From the operational side, I want you to be second angle I'd like to look at - start to look in on page six. First of all it's been - we continue to grow our planted area. It's a lot to remember the first harvest of this company was over a little - in over four years ago, a little over four years, it was June 28, 2008 still a little more than four years we have growth significantly in terms of size, area, revenues. So, there's been a steady and constant growth which we're quite pleased.

 As for [eaves], I think it's been a pretty tough year, but you have to understand that we have to go one level below. First (inaudible) that I have to lower it down, so I'll try and lower it down. So when we look into [youths], I think we have to separate. First of all, on sugarcane it's been a terrific year. We have achieved in our sugarcane operations over BRL1300 per hectare in net income which is fantastic result. We're pretty pleased both with yields, costs, harvest costs, all things related to [routine] we believe is being a very good year for us as a company.

 Also, when we think about operations in [money held] and POE, pretty interesting results in corn, very interesting results on beans, but then when we look to buy year, then it's been a real challenge. Yields there have been extremely low, mostly because of the weather. On the next page you're going to see some of the details regarding that, but yield has [pretty low] there.

 But nevertheless, when you look into the portfolio the whole thing, sugar cane and the [mariel] and POE farms were fundamental, instrumental in actually despite the bad weather in [Brazil] to help us deliver positive results. We are pleased with that and yet frustrated because there's always stuff to have to do with this kind of yields that we achieved in some productions in [Brazil]. But overall, when we look into the overall productivity and the yields for the company, the developed area closing on 60 [bags] per hectare despite some bad weather in Brazil, I think it's an outstanding result of Brazil's average.

 So we're pretty pleased with that. And I also, when I look into second corn crop - second crop corn at 48 bags, I think it's pretty interesting because you have to realize those - that corn is being planted in [mariel] and PEO which are regions of [bijou] that second crop is [being used]. It's something that we as land developers like to push for it, just to create yield technologies, improved technology, improved cash flow over time, those margin revenues and this is pretty new in the region. So we're quite pleased that we are already achieving positive results, generating a second crop in those regions which have not been the case.

 And also since we remember you know four or five years ago 50, 60 bags per hectare of corn in second crop, that was yielding [much grosser]. So we're quite pleased with our result and believe that will be an avenue for enhanced cash flow in those farms, generating higher value for the farm as a whole going forward.

 On the next page, page seven, give you an idea of how the rain fall landed by year this year. This is one specific farm of ours. The bars are - the columns are the actual rainfall level in millimeters and the line - the yellow line is the historical average. So you can see that February, March and April are significantly below historical averages, including [April] without any rain and this is pretty unusual and probably never happen in Brazil in the last 40 years that we have data for. And not only it makes yields lower, but also it makes it incredibly hard to predict the final yield. Because you start to have problems with quality and the weight of the seeds - of the grains at the end, it makes it very hard to actually predict what kind of yields you're going to have.

 So to give an idea of how these went, soybeans, for instance implanted before November 12 it had a budget of 49, we actually harvested 52, almost 53. And if you think about soybeans planted between November 13th and 16th we had a budget of 53 bags and actually harvested 46. Below is still within a reasonable range. But then, all the soybeans planted after November 17th are actually a 70% reduction. We had a budget of 45 [add up from 13] still it's pretty tough. So, as we were saying, real estate is pretty good results. Operational [isn't necessary].

 Some very good results in sugar cane, good results in Mariel and POE, now not so good and pretty bad results in [Baier]. But overall, I guess diversification kind of held that the company together in that term. So we are pleased with that, but of course extremely frustrated with the results, especially because we had a - we had a plan and we actually believe it was being pretty good until very late in the season.

 On page eight, here is something that was getting a lot of feedback from investors and analysts wanted us to have more information out there. So, for the first time, we are presenting production costs for the company. So in this case you're putting with, according here beans and corn and that is costs of goods sold or costs per hectare, both for beans and corn. And then we break it down by [600] variable and the main components of [them].

 Couple comments here, first of all, when we look into the overall number, so 1600 more or less for beans, this is very competitive by any standard when compared to other players or when you look and see consolidated data by any farmer's association. So it's a pretty competitive [cast] but also it's interesting to know when you compare that to those other farms, the components are quite different. In our case, we carry a much higher than average of appreciation, which is pretty much related to all of the investments we do in the farms.

 I don't know if all of you know that, but all investments we do in opening a farm and developing a farm, we're depreciated that yearly and that flows to our income statement for creating an important impact in there and that most farmers develop as of a farmer - if you were a farmer, developed the farm and having to build the developed farm you don't have the kind of depreciation. And also, all the machine services we don't treat that as depreciation since we don't have the machinery, we treat them through that as a variable costs as we buy services as we need.

 So, we're pretty competitive and I guess my opinion is that our break downs costs quite interesting and puts the company in a better shape to deal with costs and cost variations.

 So, we talked a little bit about real estate, talked a little bit about operational performance. And let's talk a little bit about derivatives. I think that's an important topic as well. On page nine, that is all the hedge position as of - for the 11/12 [posits]. Pretty much all of it has been fixed, all of it has been sold already at 45 reals, which is way above our budget from last years, but I'm not being lower than the actual market price, and that will have an impact we're going to be discussing.

 Also already have some of its [spells] in 2012, 2013 hedge. Our hedging policy - regional hedging policy we start looking to the markets on February, March already trying to understand what would be the expected cost to procure and also house the future prices for beans and corn looking like.

 And if we find attractive margins, for instance 20, 30% above historical average, we start actually hedging and by that we mean we start inputs, so mostly fertilizers, which are the most important one. And also start to sell soybean contract and also exchange rates and dollars. And that generates an important - sets the margin for the company at attractive levels and that's how we manage it.

 But then, what happens and we'll actually discuss the impact of doing that kind of strategy on page 1 is that there might be mismatches and these are something very important [always] of this year. When I look into derivatives 11/12, how we see them. Those are derivatives of a hedge that is related to product that have been harvested or sold or in our inventories by June 30th. So, all the products that somehow we have accounted them for in our results either because we've sold them or because they had put at a [front] value by using IFRS. We considered the derivatives associated with them in our results.

 So, all the derivatives, the ones that are being realized and the ones that are realized that are related to those crops they have impacted both our net profit for this year and also our adjusted EBITDA, and they represent a negative results of BRL8.3 million, right? That is the right [way escalate]. There is one [technology] though that impact the result, which is all the rains we've had in stock and inventory on (inaudible) which is over 40,000 tons of corn and almost 20,000 of beans were accounted for using average price at the day of the harvest. And this, for instance in the case of soybeans, was roughly 45 reals. But because soybean prices went up so much during that period, by June 30th those - that same soybean had a price of BRL57. So what happened?

 All the derivatives were prices at BRL57 and the inventory was priced at BRL45. So there's a mismatch in there, which actually is higher than BRL8.3 million, [because over] we can be as high as BRL10 million, but for a set in all of these losses, and that result you show up in our first quarter result. As we sell and we are selling all this corn and beans, this result will revert as you don't have that mismatch in there. So this is one important thing. Though, typically for instance last year this - the valuation of prices between the day of the harvest and the day of June 30th for instance was very small. Was not that big. Therefore this mismatch was not significant. But this year, prices are not - I mean up almost 30%, before there is an important mismatch that I had to consider. And also derivatives 12/13 it is something that is already impacting and is almost BRL11 million negative.

 That has already impacted our net income for this year, but relates to product that we're going to be growing next - this year - next year right. Therefore, we cont have an operational comfort price to them. You can only have those by March 30th when we're going to start accounting for the next year in soybeans and other books before we carry a loss on derivative s that have no [comfort] part from the operational side.

 So those still together represent roughly BRL10 million of negative impact that will be reverted in the course of - part of it in the course of this quarter, part of it until the end of this fiscal year. So I think it's important that when we are looking into the company we understand all the buckets and the derivatives one is a pretty important one to understand fully and the detail all the numbers in the company.

 And the fourth, will lead to - which lead to page 12, which is the adjusted EBITDA at roughly BRL9 million. And here, we are first of all eliminating any effect from biological assets that are information that are not relatively sold, because we do not believe [ability of slight separation] results of the year and also by adding back - subtracting this case, had resulted from [parlets] that we are already accounting in the revenue or the logical assets lines.

 Statement of operations and I got this BRL6.6 million before taxes, BRL19.4 million and this is pretty much if I am doing and making the company from what holistic approach they can account derivatives, those numbers actually will be positive. So overall a (inaudible) for the company in that sense and good results some value on especially from the productivity done by year.

 From balancing perspective, I think important to notice inventories, which are carried at a different price than - price from June 30th and also from current prices so that would be a positive impact in there.

 And also, important to remember that our farms are classified as investment properties and also they are carry our books of costs. So all the valuations we do understand the variable harms today that for value do not impact our balance sheet. So the forms remain at cost. The only - it's all adjusted when we sell them as we did with San Pedro this year. And on page 15 to finalize, the beginning of this year we started a very targeted approach to increased liquidity of our stock.

 So, by reaching out retail market, presenting the company to small and medium sized investors and individuals we've been able to actually see an [initiative] increase of volume, number of trades and actual number of shareholders, it's an important number.

 So, we are pleased with that result if it's an important matter for the company to keep on improving liquidity, and this program, this work of ours has been pretty successful as you can see by the numbers as we'll continue to do that for the [lease] this trend of liquidity will continue to improve for the next quarters.

 In a nutshell, that's what I had for today. So, let's move to Q&A then.



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Questions and Answers
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Operator   [1]
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 Thank you. The floor is now open for questions. (Operator instructions). Our first question comes from Pedro Richards with Raymond James. Please go ahead.

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 Pedro Richards,  Raymond James - Analyst   [2]
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 Hi, Julio. Thanks for the call. Could you give any guidance on planted area expected for the upcoming 2012/13 harvest? And if you are expecting any change in the crop mix? Thanks.

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 Julio Toledo Piza,  Brasilagro - CEO   [3]
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 [Obviously], thanks for the question. You know that we do not - we don't give out guidance but it's always fair to assume a similar growth to last years. It's a natural increase in our planted area.

 I do believe the change in mix, I think it's going to be more concentrated in beans. If we look into what happened at the company from '11 to '12, we saw a significant increase in corn, especially because areas go more mature and for allowing us [to do] corn. This year there will be an increase in beans, significant one and not so much in corn. Actually there'll be a reduction in corn overall. Just because actually prices and more expected margins make that the optimal location. And also, cotton of course will be reduced as prices are not nearly as attractive as those of soybeans.

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 Pedro Richards,  Raymond James - Analyst   [4]
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 Okay, thanks. And have another question regarding the land turn formation business. I see you still have a land bank of around 60,000 active to develop, what would be normal annual pace of land turn formation in number of hectares? And what's the cost of turn per hectare today? Thanks.

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 Julio Toledo Piza,  Brasilagro - CEO   [5]
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 Pedro thanks for the question. Yes, we have roughly sixty, a little bit less already. The main factor in defining the speed of transformation today would be permits, environmental permits. So for instance, as you all know (inaudible) we still don't have those permits. That is a - almost 20,000 hectares that is setting aside that we cannot touch. The order forms are going pretty fast, I'll say. So expect another six, 7000, 8000 per year.

 I think it's a side from (inaudible) which is a different gain, a different scenario thing, it's just added assumption. T he cost today it varies. It can be as low as 13, 1400, it can be as high as 2300 reals per hectare. It really depends on the region you are and what kind of vegetation you have on top of it and why necessity for (inaudible) issues, but it cannot vary between 1400 and 2300 reals per hectare.

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 Pedro Richards,  Raymond James - Analyst   [6]
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 Okay, excellent. And has there been any news on the - updated news on the farmland regulations to foreigners in Brazil?

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 Julio Toledo Piza,  Brasilagro - CEO   [7]
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 Yes, there's been a news today actually. There is a project that has been voted today that's pretty good for us. I think it's pretty good for the country, which means we are moving in the right direction. I don't like to speak (inaudible), its taking longer than we'd like and I guess that is how we have to deal with it. Its moving in the right direction, but it's still (inaudible). I think it's going to take longer than we anticipated but yes it is moving and it's not going to the right direction.

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 Pedro Richards,  Raymond James - Analyst   [8]
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 Excellent, thanks a lot Julio.

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Operator   [9]
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 Our next question comes from Pedro Herrera with HSBC. Please go ahead.

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 Pedro Herrera,  HSBC - Analyst   [10]
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 Hi, Julio, good afternoon. How are you doing? Could quick question, if we were having this conversation a year from now, end of FY13, what would you think your break down in terms of revenues, in terms of crops? Would it be mostly soybean and sugar cane or how would you see a breakdown 12 months from now? That's my first question.

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 Julio Toledo Piza,  Brasilagro - CEO   [11]
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 All right Pedro, thanks for the question. I think the breakdown will be highly concentrated on beans and sugarcane. Those will be the most important crops as corn will be reduced from this year. But beans will represent an important part of it and sugar cane will be pretty much the same as this year, I would say, roughly. But beans will increase significantly.

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 Pedro Herrera,  HSBC - Analyst   [12]
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 Okay, my second question is in terms of Brazil in general, there's significant new acreage coming on line for soybean in general. Is there that - is that to the detriment of another crop? Is there more soybean and less cotton for example? Or is it just a general increase of more planted area throughout the country?

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 Julio Toledo Piza,  Brasilagro - CEO   [13]
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 I think both factor are there, Pedro. I do believe there will be a shift from other crops to beans. Has been - not only have a very attractive price, but they have a very low transactional cost from the commercial perspective. So it's pretty simple to actually sell beans in very simple and easy to do it and you can actually finance it pretty easily, so I got some first crop there will be an important shift from other crops to beans.

 On top of that, there will be expansion mostly from pasture in [monto grosso] and some new areas in the [mont petro] region, which is always interesting because as you put new hectares you actually change the cost curve and you make this new - this extra volume more volatile or less [pecuit] if you will. But again, for instance if you think about [Baier] last year there was an important production of corn in Baier and cotton and for this year, this coming year, I'm quite sure corn and cotton will not be as important for Baier, that's for sure. Just because the prices are much better for beans.

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 Pedro Herrera,  HSBC - Analyst   [14]
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 Okay. Thank you.

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Operator   [15]
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 (Operator instructions). Our next question comes from [Rodrigo Nuguburu] with Morgan Stanley. Please go ahead.

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 Rodrigo Nuguburu,  Morgan Stanley - Analyst   [16]
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 Thank you. Hi, Julio. My question is related to breakdown on the soybean area. We're going to start this 12/13 plant increase soon. I'm trying to get a sense on how much of the area of soybean is going to be first and second year and how much is more than three years because that always is going to have an impact on yields. Can you give us some visibility on that?

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 Julio Toledo Piza,  Brasilagro - CEO   [17]
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 Rodrigo, I don't have the numbers with me right now, but what's going to happen for next year in the (inaudible) the developed area is going to increase significantly because all the costs in corn area that'll be put back to beans is developed area. So what's being happened in the company in the last three years is that all the mature areas we were - were transferred either to cotton, to sugar cane or to corn and this has been the case all the years as we were getting more mature. All these hectares the better - and the best hectares were transferred to those more demanding crops.

 First of all, sugar cane is already down, we didn't have to move anything and this year, because of prices, margins, most of the cost in corn hectares are going back to being - before there will be an important shift, we're going to have a more developed hectares for beans proportionally. Right? So we are adding an important amount of hectares to beans, but an important amount of hectares that were to cotton and corn are now being the fourth - the bean portfolio is going to be more balance, its going to be more mature, more underdevelopment and revenue proportionally.

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 Rodrigo Nuguburu,  Morgan Stanley - Analyst   [18]
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 Okay, perfect.

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 Julio Toledo Piza,  Brasilagro - CEO   [19]
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 But then again, you can call off line and discuss this in more detail.

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 Rodrigo Nuguburu,  Morgan Stanley - Analyst   [20]
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 Okay, sure. Perfect. Thank you, Julio.

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Operator   [21]
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 (Operator instructions). Showing no further questions, I would like to turn the conference back over to Mr. Julio Toledo Piza for final consideration. Mr. Piza, you may give your final considerations now.

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 Julio Toledo Piza,  Brasilagro - CEO   [22]
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 First of all, thanks everyone for joining us. As I said before, I think (inaudible) some very interesting results on the real estate. The frustration at the operation aside, but also some good news as we were able to hold up together to give (inaudible) by year. So all in all, I think it's a sufficient year for the company as we continue to grow and mature our portfolio.

 So, as I'll see you guys next quarter, and we're going to be discussing all of this derivatives impact and the results of that are going to be quite interesting. So thank you very much for being with us. See you next quarter.




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