Q1 2013 Brasilagro Companhia Brasileira de Propriedades Agricolas Earnings Conference Call (English)

Nov 23, 2012 AM EST
AGRO3.SA - Brasilagro Companhia Brasileira de Propriedades Agricolas
Q1 2013 Brasilagro Companhia Brasileira de Propriedades Agricolas Earnings Conference Call (English)
Nov 23, 2012 / 05:00PM GMT 

==============================
Corporate Participants
==============================
   *  Julio Toledo Piza
      Brasilagro - CEO, IRO

==============================
Conference Call Participants
==============================
   *  Pedro Richards
      Raymond James - Analyst
   *  Rodrigo Mugaburu
      Morgan Stanley - Analyst

==============================
Presentation
------------------------------
Operator   [1]
------------------------------
 Good afternoon. Welcome, everyone, to Brasilagro's First Quarter 2013 Results Conference Call. Today's live webcast and presentation may be accessed through Brasilagro's website at www.brasil-agro.com. We would like to inform you that this event is being recorded and all participants will be in a listen-only mode during the Company's presentation.

 After Brasilagro's remarks, there will be a question and answer session for analysts only. At that time, further instructions will be given. (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, CEO and IRO. Sir, you may begin your conference.

------------------------------
 Julio Toledo Piza,  Brasilagro - CEO, IRO   [2]
------------------------------
 Thank you. Thanks, everybody for joining us at our conference call of our first quarter. If you move to page two in the presentation with our highlights. I think it's been quite an interesting quarter for us, even though it's a preparation quarter for us where we are just preparing for next year's season, I think it's been quite interesting.

 First of all, our net revenues went up significantly, reinforcing the growth in the Company, 7% but let's keep in mind last year we had a farm sold in the first quarter and this year we didn't. Therefore -- actually we did it but it's not accounted here. It's going to be accounted in next quarter. Therefore, the growth is pretty important.

 The same for the adjusted EBITDA, BRL7.2 million, above last year's when adjusted for farm sales. Also we sold a farm which has not been accounted now, it will be next quarter.

 Also we should grow our planted area for around 82,000 hectares. Also a great product for us was upgrading our ADR program to Level 2 and then we listed the Company on New York exchange, it's a great achievement. It's the first Brazilian company in the last three years to do so, and the first agricultural company. So Brasilagro continues to be a pioneer both in terms of the regions we go and also by listing on New York. So greatly proud of that.

 On page three as we always start talking a little bit about scenarios. This is soybean prices in both -- in terms of bushels per -- dollars per bushel and also reais per bag. What caught my attention here I'd like to point out is extreme volatility in the market so if we look at what happened in the last six, eight, nine months costs have gone up, went down, went up, went down again. And therefore that has a very important impact in our (inaudible) results.

 Given the fact we don't have the operational results from that season of the crops, all this impact, the variation will flow to our income statement before generating a higher than desired volatility in our income statement. But again, apart from the volatility, prices are at a very interesting level. The full year, quite excited and expect to have an interesting margin per hectare in the coming year.

 On page four, we show the overall land prices in Brazil by FNP, that's how it behaved. It's been behaving the last six years. It's been going up and of course the real reason for that is cash flow performance continues to be a strong one, stronger than (inaudible) have had a series of years of good yields in general, good prices with forward cash flows are strong in the fourth. Farmland prices continue to be at a very interesting level, continue to go up.

 On page five, putting back a chart analysis that we do in the past showing all the farms, all the acquisitions we made and also all the sales and the soybean prices, the size of the bubbles, the size of the deal. I think it would be good [to show while] of this analysis that it is a cyclical business and you've got to be smart the moment to jump in and out so when we see the price we are seeing right now, the level of activity in the sector, it seems that it is a good year to sell farms rather than buying. So that's how we behave as a Company, taking advantage of the cycle to be better positioned both in terms of acquisitions and sales.

 Then on page six that is a snapshot of Horizontina Farm Sale. We bought the farm in 2010, a couple of thousand hectares were in production, a massive investment opened up party much the whole farm, finalized all the infrastructure, roads and everything. The farm is connected to the national power grid. So the farm has been developed and of course that demands an important appreciation in the price.

 So we bought it for BRL37.7 million, added another BRL10 million or so in investments, sold the farm for BRL75 million cash. That generated a 27% internal rate of return. That internal rate of return does account for the real estate gain and also the crops we produced there as well. It's also important to know that we are going to be operating this farm until July next year.

 This is a very important sale for us for several reasons. First of all it is always a good way to show the market the hidden value in our balance sheet, the farmer was [on] our books for a much lower value than the one we sold and that is true for all of the farm we have. So it is an important sign of all of the hidden values that we have in our balance sheet and also shows that when we do our independent appraisal or our internal appraisal it is a fairly good estimate of the real market value of the farm.

 It's also important -- it also -- the sale shows a few other things. First, this is going back the kind of feedback we got from the market in the last few years. So people were asking us is it possible to sell farms? Yes, that is possible and it is an important farm that has been sold. It's an important ticket, a sizable one, 70,000 [reais].

 Also we sold it for cash which also was a source of questioning about the market. Is it possible to sell farms at cash? Yes it is. We sold it. Also an important thing is this farm was bought in 2010, which was four years after the Company was founded and it was after the initial boom in commodities in 2007 and 2008.

 This is also important thing to notice because I've had people telling us, you did a [massive] portfolio but that was before the commodities boom. It was 2006 and '07. It should be much harder to do it now. And that's a very interesting proof that actually our business model can continue to operate with farms but a couple of years ago and generated a fascinating rate of return. So we are extremely pleased showing in all of this buying, developing, and selling a farm can generate significant return for our shareholders.

 On page seven, a snapshot of how we are evolving our planted area, an important growth over almost originally 2,000 hectares up from [22] in our first year of operations. Developed area is not as high as last year's but it is still an important number and of course that is dependent on permits, environmental permits. So expect for next year to continue to grow at an important rate.

 On page eight, a snapshot of all of our hedge situation. Roughly 30% of our soybeans has been sold [physically] and roughly between 61% to 63% of the price has been fixed depending whether it's soybean or the exchange rate. At a very interesting price today our market to market is around BRL50 per bag which is above current market prices.

 On page nine, our EBITDA and adjusted EBITDA. The EBITDA is by the accounting definition. The gross profit adjusted by selling expenses. G&A and also depreciations and had a roughly BRL10 million which was lower than last year's. Last year it was BRL16 million, you probably will notice we have BRL10 million were roughly the EBITDA from selling the farm last year, Sao Pedro farm.

 So when adjusted by that, we had an important increase. But then again, the important one for us, the adjusted EBITDA, that is the one we are following via the Company and the (inaudible) difference so it's important to mention to begin with we take out all of the biological assets -- all of the growing plants, so either because it's a corn plant or soybean plant or all of the sugarcane that will be harvested in the coming years.

 All of that effect that has been accounted in the biological assets is being removed. We only left everything that is ready to be sold. That is adjusted. So everything that is biological assets that is not ready to be sold we take it out and also we actually put it back, all the derivative results as it related to whatever gross profit we are discussing.

 So everything, all of the derivative results that relate to products that have been accounted for in our gross profit, we have been -- were added back and all the derivatives that relate [gross] to products that are will be produced next year, we took it out so we can have a fair value [base] of comparison. And adjusted EBITDA to BRL7.2 million also significantly above last year's when adjusted for farm sales. Just remembering that -- reminder that Horizontina will be added, will be shown in our next quarter.

 On our statement of operations, as I said 18% increase in revenue is a pretty important one especially when we take the (inaudible) as a remark when I think about [rents] they pretty much doubled revenues which is a pretty important thing to us. Selling expenses they are not basically because of a much higher volume [increments]. Some of the G&A is related to the ADRs that were (inaudible) the recent process to list it as a one-time expense.

 The financial results. The most important result is the derivatives given the fact that by September 30 prices were much higher than they are today. That has had an important impact -- were higher than June 30 and then much higher than they are today actually so they've had an important impact. And all of this actually income that we are accumulating towards the end of the season.

 On page 11 is a snapshot of our balance sheet. And just always important to remember that all of the farms have been accounted as properties for investment and all of them are clear at book. So when you think about the farm Horizontina, the sale of Horizontina farm that will be an important bump in our balance sheet as BRL45 million will be take out from non-current assets at profit for investment most of it and an important amount will be added as cash. So our balance sheet will show that sale (inaudible).

 On page 12, just a reminder of our ADR listing. Now we have AGRO3 at Novo Mercado and LND in New York Exchange. That's what we have to tell you guys. We can move it now to Q&A. Thanks.



==============================
Questions and Answers
------------------------------
Operator   [1]
------------------------------
 Thank you. The floor is now open for questions. (Operator Instructions). Our first question comes from Pedro Richards of Raymond James. Go ahead.

------------------------------
 Pedro Richards,  Raymond James - Analyst   [2]
------------------------------
 Hello, Julio. Thanks for the call. My question is related to the farmland market in Brazil if there has been any updated news on their regulation and the talk about foreign farmland ownership in the country. Thanks.

------------------------------
 Julio Toledo Piza,  Brasilagro - CEO, IRO   [3]
------------------------------
 Hello, Pedro. Thanks for the question. No formal update there, just a series of announcements by government officials saying that this problem will get solved pretty soon so we heard all the government saying that. We already have a proposed view at the Congress which is a very favorable one.

 It seems to me things are starting to move. But again, it's very hard to predict anything on that. So no, nothing, no news, no hard news. It seems that it's moving by what I have heard from government officials and the way set up is pretty good but we have to wait to see the final results of it.

------------------------------
 Pedro Richards,  Raymond James - Analyst   [4]
------------------------------
 Excellent. Thanks.

------------------------------
Operator   [5]
------------------------------
 Thank you. (Operator Instructions). It looks like we have a follow-up from Pedro Richards at Raymond James. Go ahead.

------------------------------
 Pedro Richards,  Raymond James - Analyst   [6]
------------------------------
 Julio, do you have an internal estimate for crop production in Brazil compared to the ones of USDA to share with us and your outlook for crop prices for the next month? Thanks.

------------------------------
 Julio Toledo Piza,  Brasilagro - CEO, IRO   [7]
------------------------------
 Pedro, thanks for the question. We don't have a specific estimate for the coming months. We don't actually, it's very hard for anyone to try to understand what is going to happen for us in the short term. What we believe is that the overall balance between supply and demand remains a tight one, therefore prices will have a sustainability going forward. That's what we believe.

 Whether they're going to be 5% lower or higher in the next few months, very hard to predict but I do believe that stocks continue to be extremely tight especially in corn so I think there's no hard reason for prices to go down.

 As for an internal estimate of Brazil we are still waiting to see. An important thing that every time Brazil increases its area significantly as it seems to be the case this year, there is a higher volatility in productivity and yields. Therefore, I guess this year will be one that probably is going to be very hard to estimate as any small changes in the weather patterns will have a significant impact because as you add more area, more hectares you tend to become much more sensitive, (inaudible) to weather patterns.

 So there's going to be a tough year for predicting other volumes out there and if you look into the past, USDA tends to be a little bit optimistic about Brazil. I guess in the last few years every single year USDA estimating Brazil to produce more than actually it did. So let's wait and see.

------------------------------
 Pedro Richards,  Raymond James - Analyst   [8]
------------------------------
 Thank you.

------------------------------
Operator   [9]
------------------------------
 Thank you. (Operator Instructions).

 Ladies and gentlemen, actually it appears that our speaker line has disconnected. We will put a hold music in until we get them back on the line.

 All right, ladies and gentlemen, we have rejoined the speaker line. We go back to our question-and-answer session, if everybody is prepared.

 Our next question comes from Rodrigo Mugaburu of Morgan Stanley. Please go ahead.

------------------------------
 Rodrigo Mugaburu,  Morgan Stanley - Analyst   [10]
------------------------------
 Thank you. Hi Julio. Good afternoon. My question is related to the sale of Horizontina. What are the plans for the proceeds? Are they going to go to fund CapEx for the next year or do you have different plans for the proceeds of the sale of the farm? Thank you.

------------------------------
 Julio Toledo Piza,  Brasilagro - CEO, IRO   [11]
------------------------------
 Thank you Rodrigo. It's a very important question. I believe the most important -- from an accounting perspective, the sale of this farm opens up a new possibility for the Company as we will see in the next quarter. The sale of this farm will actually increase our reserve of accumulated earnings and it will make them positive. Before opening up the possibility for the Company to pay out dividends or initiate a share buyback program so actually the sale has a very important meaningful impact in our books.

 So that opens up a series of opportunities for the Company, both in terms to pay back shareholders either by share repurchase or by dividend, opens up -- of course we have the possibility out in CapEx, we have a very aggressive CapEx plan, going forward and of course acquisitions. There is a series of possibilities of us that we could explore so of course and being very -- trying to cover all the bases here but definitely one of the three are the ones that will happen in the next six months.

 Either we're going to focus on CapEx, definitely we expect to see some acquisitions. And of course paying back the shareholders is also always a very interesting possibility. That is only possible now given the sale of this farm.

------------------------------
 Rodrigo Mugaburu,  Morgan Stanley - Analyst   [12]
------------------------------
 Great, thank you.

------------------------------
Operator   [13]
------------------------------
 Thank you. This concludes our question-and-answer session. I would like to turn the call back over to our management for any final remarks they may have.

------------------------------
 Julio Toledo Piza,  Brasilagro - CEO, IRO   [14]
------------------------------
 Thanks everyone. As I said before this is a preparation quarter for us as we prepare for the next crop, the next season. But it's been a very interesting one as the growth continues to be there, both in terms of topline and bottom-line and had an important accomplishment which is the sale of the farm, showing -- reinforcing our business model, generating impressive returns for shareholders and also the listing of our ADRs. So three major important points for us.

 So thanks everyone for being with us and see you next quarter.

------------------------------
Operator   [15]
------------------------------
 Thank you. This concludes today's Brasilagro's 1Q 13 Results Conference Call. You may disconnect your lines at this time.






------------------------------
Definitions
------------------------------
PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the 
Transcript has been published in near real-time by an experienced 
professional transcriber.  While the Preliminary Transcript is highly 
accurate, it has not been edited to ensure the entire transcription 
represents a verbatim report of the call.

EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
editors have listened to the event a second time to confirm that the 
content of the call has been transcribed accurately and in full.

------------------------------
Disclaimer
------------------------------
Thomson Reuters reserves the right to make changes to documents, content, or other 
information on this web site without obligation to notify any person of 
such changes.

In the conference calls upon which Event Transcripts are based, companies 
may make projections or other forward-looking statements regarding a variety 
of items. Such forward-looking statements are based upon current 
expectations and involve risks and uncertainties. Actual results may differ 
materially from those stated in any forward-looking statement based on a 
number of important factors and risks, which are more specifically 
identified in the companies' most recent SEC filings. Although the companies 
may indicate and believe that the assumptions underlying the forward-looking 
statements are reasonable, any of the assumptions could prove inaccurate or 
incorrect and, therefore, there can be no assurance that the results 
contemplated in the forward-looking statements will be realized.

THE INFORMATION CONTAINED IN EVENT TRANSCRIPTS IS A TEXTUAL REPRESENTATION
OF THE APPLICABLE COMPANY'S CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO
PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,
OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALLS.
IN NO WAY DOES THOMSON REUTERS OR THE APPLICABLE COMPANY ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER
DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN
ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S
CONFERENCE CALL ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE
MAKING ANY INVESTMENT OR OTHER DECISIONS.
------------------------------
Copyright 2017 Thomson Reuters. All Rights Reserved.
------------------------------