Q3 2013 Brasilagro Companhia Brasileira de Propriedades Agricolas Earnings Conference Call (English)

May 09, 2013 AM EDT
AGRO3.SA - Brasilagro Companhia Brasileira de Propriedades Agricolas
Q3 2013 Brasilagro Companhia Brasileira de Propriedades Agricolas Earnings Conference Call (English)
May 09, 2013 / 06:00PM GMT 

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Corporate Participants
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   *  Julio Toledo Piza
      Brazilagaro Companhia de Propriedades Agricolas - CEO

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Conference Call Participants
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   *  Martin Tapia
      Raymond James & Associates - Analyst
   *  Ravi Jain
      - Analyst
   *  Rodrigo Ogoburu
      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 Third Quarter 2013 Results Conference Call. Today's live webcast and presentation may be accessed through Brasilagro's website at www.brasilagro.com.

 We would like to inform you that this event is 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's 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,  Brazilagaro Companhia de Propriedades Agricolas - CEO   [2]
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 Thank you. Welcome, everyone, to our third quarter conference call. If you like, you can move to page two of our presentation with the highlights.

 Over R$128 million of revenues for us -- a positive net income of R$9.5 million in the nine months ending now, and also an adjusted EBITDA of almost R$21 million. We're going to go over the details later. That's just the highlights.

 We announced this week the sale of a portion of Araucaria Farm at a very attractive price, a total sale of almost R$12 million. And I'm going to comment on that as well as we go through the presentation. And before we go into the details of our operations, a little bit of how we see the scenario falling out.

 And here, on page three, we do have soybean and prices, both in reals and dollars. And how they are behaving. So, volatility you see there. Overall prices probably about last year's average, but came down significantly in the last year or so. But what catches our attention even more is that when we start looking into next year results.

 On the bottom of the page we do have the soybean prices. The May 13 contract in Chicago. And the May 14 contract, and both in dollars and in reals. There is a significant decrease in prices, which points out to a very tough year.

 We do believe margins will not continue to be the same for the next year, which will be important for farmers in order to understand increase in area, total product. And so, we do believe it's a sign for us to pay attention -- close attention -- to costs and to expansion.

 We still have a very bullish feel on the fundamentals of the sector. But that kind of volatility, I think it's important to continue to be there. And also, I think it's good for the Company. I do believe Brasilagro is much better prepared to deal with that type of volatility than the average farmer. And also, it will be interesting to see how that will impact farmland prices.

 If we move to page four, this is what has been happening in Brazil in the last six years. Those are [F&P] prices. And it will be interesting to see how these new reality margins will play out in terms of farmland prices. Certainly, it will affect every region of Brazil differently. And we're going to be there paying close attention to it because we do believe there will be opportunities arising from that kind of change in margins.

 Moving to our operational performance on page five, we have concluded over 83% of our soybean harvest and 35% of our corn.

 Also important to notice that we have our beans and corn concentrated in the northeast of Brazil. And in those regions, both the planting and the harvesting are delayed when compared to Mato Grosso and the more core areas of Brazil. That is the reason we are still under harvest.

 We also have planted over 3,000 hectares of second corn crop in Piaui, which was also a very good thing as this region does not have a history of doing so. So, we're pushing the envelope here and going for a second crop in that region. And we are quite pleased with the results so far. We believe it's going to be a new layer of returns of that specific farming region.

 Also, we started to renovate our sugarcane area already. And also, we continue to develop new hectares, which is very important.

 You've seen that we sold farm this year already -- two farms. And it is important that we keep on developing new hectares to replace the ones we are selling so the whole engine, the whole platform, is at full capacity.

 So, we have over 12,000 hectares being developed right now that will be added to our production early next year. On page six, we published yesterday our results. And we touched the yields aspect of our production.

 And here I'd like to comment a little bit more on that. So, on page six, I have put in here, first of all, the rainfall level for both Maranhao and Piaui, and by year. Right?

 We can see that on both regions we had much drier Decembers and Januaries, when compared to historical average.

 And those have been very important and have impacted negatively the yields, as you can see from CONAB estimates, which is the Compania Nacional de Abastecimento, which actually keeps track of how yields are happening in Brazil.

 So, for an example, in Piaui, CONAB was expecting 48.6 bags last year. And now it's current estimate that was published today it points out to a little bit more than 32. So, an important reduction. And that is the same for Bahia. An important reduction in productivity. And now because of the rainfall it was not as good as expected.

 If we look into what happened in the last ten years, we do believe this is a very abnormal year. It's not likely to happen again. But it could, of course. What we do is weather-dependent. But we do believe that it's a very atypical year. And then when we look into our own productivity and compare to those that are happening overall in the regions, we are quite happy.

 You can see that our most developed areas in those farms, in those regions, we have achieved close to 45 bags already, which assures us that we are in the right path in terms of developing those farms to be extremely productive.

 Of course, by having new areas, by expanding out every year and having those undeveloped areas -- very new areas in our portfolio -- of course, makes us more vulnerable to that kind of weather. That is the reason why we can see how different productivity is, depending on how mature the area is. I think it's part of developing farm is to be more exposed to that.

 But, of course, that kind of exposure is what enables us to offer such interesting returns in the real estate as the ones we have been showing and the farms we sold.

 On page seven, just a quick pass on our hedging. Pretty much, everything is done for this year -- close to R$49 per bag, which is pretty much the market.

 We haven't done anything for next year yet. Still looking forward to interesting margins in terms of the difference between the prices and the costs. And the moment that we start seeing those, we'll start hedging.

 On page eight, a little bit more of detail on the part of the farm we sold. So, as we said already, it is 394 hectares, of which three-tenths are arable. We sold it for 800 bags of soybeans per hectare, which is roughly R$38,000 in terms of nominal value.

 That specific part of the farm is sitting in our box at R$3.6 million. As you can already see, it represents -- if you were to divide the acquisition by that arable area, you would have less than R$10,000. And this portion of the farm we are putting in our bucks -- would have put in our books a R$12,000-plus per hectare because it represents a slightly better than average portion of the farm -- the one we are selling right now. And that is the reason why it captures a higher share of its cost.

 But, nevertheless, it is a very attractive sale for the Company. Very interesting return. Very interesting appreciation. And, if we are to actually fix the soybean prices for the installments we're going to receive over the next three years using the current future curves, we would be getting an internal rate of return of over 20%. Right?

 And that return is over -- it accounts for the whole period of time. Meaning it goes from the first payment we did back in '07 until 2016 when we get the last installment -- the last payment -- for the nine-year span. And if we are to have everything now, we're going to reach over 20% internal rate of return.

 So, it's a very attractive result. Again, reinforcing our investment [CZs], and the whole part of the Company of developing that land. And showing that those kind of investments can achieve substantial returns over a very interesting period of time. So, we're quite happy with that sale. And certainly looking into more of those.

 On page nine, a discussion of EBITDA and adjusted EBITDA. Always good to remember that we adjust EBITDA for biological assets. So, everything that is just being calculated as future returns or future earnings, we take them out so the EBITDA can reflect what was the operational result for the Company in that quarter, excluding any future results. Also, we add back any hedge that has impacted the operational returns.

 Under that deal, our Adjusted EBITDA for the quarter is a little bit negative -- R$2.4 million -- which, of course, is a reflection of all the lower yields in soybeans. But when we look into the accumulative version for the year, it's over almost R$21 million. So, the Company continues to generate cash.

 And, of course, our sale of Araucaria is not reflected here. So, this is going to go up even more. But the Company continues to generate cash, which is an important thing for us. So, this is going to be our third year in a row in the positive EBITDA side, which is a sign of the Company getting more and more mature.

 The next page, on page 10, income statement. I would like to call attention here for our net income accumulated. Of course, it is a little bit negative for the quarter because of the soybean. But on the accumulative for the year, we already are at almost R$10 million, and we should be even higher until the end of the year.

 Therefore, the Company is already generating a positive net income -- not only cash, but net income.

 So, we are on a clear path to have accumulated returns on the positive side, which would enable the Company to start any -- for instance -- dividend program, if that is the case. But the fact is to see the Company that was burning cash to reach positive EBITDA and now we are about to reach a positive net income as well.

 On the balance sheet a thing that is important to notice that (inaudible) farm has been removed from our properties for investment. That's the reason why it went down. And, of course, cash went up and net worth is going up as well.

 So, when I look into this, of course, there is somewhat a level of frustration regarding the soybean yields. But, definitely, the overall picture of the Company -- the Company keeps getting stronger and stronger as we are more mature.

 So, being less affected by the weather and the future, and generating all this very interesting capturing, and all these interesting returns that we recreated in the real estate side of our business.

 So, that's what I had to share with you guys. So we can then move to the Q&A now.



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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). The first question comes from Martin Tapia of Raymond James. Please go ahead.

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 Martin Tapia,  Raymond James & Associates - Analyst   [2]
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 Hi. Thanks for the call. My first question is what is the main reason that explains the big difference that appears in biological assets? And, secondly, if you can give more details regarding the CapEx plan? Thank you.

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 Julio Toledo Piza,  Brazilagaro Companhia de Propriedades Agricolas - CEO   [3]
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 Martin, I understood you as asking about the difference in biological assets. If that is the case, I will answer. Otherwise, ask us again, please. The difference here, actually, we are accounting for the lower productivity in soybeans already.

 So, if you look into the results, you will see that we generated a positive R$18 million in sugarcane and a R$12 million loss adjustment in soybeans.

 That is the lower productivity in soybeans already being accounted for. Even though we have not sold it yet, we have not finished the harvest, all of it has been adjusted already for lower productivities. So, the whole impact of having lower yields is already in our books.

 The second -- the CapEx plan continually full on. As I said, we are already developing 12,000 hectares. We continue to develop even more. So the CapEx plan and our plans to keep on opening and developing new areas continue to be at full speed ahead.

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Operator   [4]
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 The next question comes from [Ravi Jain]. Please go ahead.

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 Ravi Jain,  - Analyst   [5]
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 Hi. Good afternoon. My question is basically concerning the lower soybean prices, do you expect the land prices in Brazil to stabilize over the shorter term? I mean, was it the huge significant position that we saw in the last couple of year?

 And secondly, if that is the case, with the cash on the books, do you expect to buy more land in Brazil? Or are you looking at options outside Brazil as well? Thank you.

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 Julio Toledo Piza,  Brazilagaro Companhia de Propriedades Agricolas - CEO   [6]
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 Thanks, Ravi, for the question. I think we have to wait and see. It typically takes more than one bad year for farmland prices to adjust down. It takes a while for this to happen.

 Nevertheless, I think it is possible -- it is possible -- that some regions of Brazil will suffer an adjustment, especially if a specific region went up dramatically in the last couple years, perhaps that would get adjusted faster.

 But, again, if you look into what happened in the last five or six years, it takes a while for prices to adjust down. Typically, they do not adjust so fast.

 Unless, of course, they have increased so much in such a short period of time that that could happen and could go down. And so, we're going to wait and see. But, definitely, it's going to put some pressure on the system.

 Having said that, I do believe we are in a very interesting moment in the Company to sell farms, not only because the Company is maturing. Therefore, we do have available hectares to be sold that have reached its full price.

 But, also, the market is liquid. Farmers are in a good moment (inaudible). They are very enthusiastic about buying new farms. So, I think it is a very interesting moment for us to be selling. Right?

 And, of course, as we strengthen the balance sheet of the Company [with those] sales, it's only natural that we take advantage of potential downturn to start expanding, and so enter a new phase of acquisitions.

 So, I think it's only natural to think that way. And, of course, we'll be looking and paying close attention to the market to do so.

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 Ravi Jain,  - Analyst   [7]
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 Thank you so much. Very helpful.

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 Julio Toledo Piza,  Brazilagaro Companhia de Propriedades Agricolas - CEO   [8]
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 I do have one thing. We have a couple of questions from the previous conference call in Portuguese that were, for some technical reason, not answered. So, I'd like to go over those before we move on.

 So, the first one comes from [Pedro Gaudi] -- he wants to know about -- given the fact we had this decrease in productivity by yield in soybeans, is there any change in the cotton perspective in terms of yields? We didn't do any cotton this year. So, we don't have our own farms to show the results.

 But that said, there has been some decrease in productivity. Some regions will be more affected than by year. But perhaps having 30%, 40%, 50% reduction. Some other regions perhaps less than 15%.

 But, definitely, there will be some impact in cotton as well in Brazil. The weather was pretty tough, not only because of the drought. But also now -- or at least a few weeks ago -- was still raining, which is pretty tough for cotton as it decreases the quality.

 So, definitely, cotton will be affected. But it's hard to say. It depends on the region of Brazil you are. Some of them will be more affected otherwise.

 Another question that I have came from Gabriel from Optimus Capital. And he's asking about the sale of Araucaria (inaudible) -- questions about the sale of the farm.

 First of all, he's asking about the supply agreement we have with [Ordobrechi Agro Industriale]. Regarding that, we have a very longstanding relationship with them that have been incredibly positive over the last seven years. The area we sold represents a very small portion of what we supply them. So, there will be no change on that.

 Of course, if we are to sell a significant portion of the farm, we would have to sit with them and find a solution. But that specific small portion of the farm -- it's really not significant in the big scheme of things. So, there will be no change on that. He's asking also about who's the buyer?

 The buyer is a farmer. As we always say, farmers are the natural buyers of the farms we have. And they are the ones that keep the market in Brazil pretty active and busy.

 So, it's a farmer from the region that has bought it. I cannot mention his name under the contract we signed. But he is a farmer. A typical farmer. A family guy. Probably expanding his operations. A typical deal.

 He is asking also about the accounting treatment of this deal. This is something the auditors will say. They will get into our books eventually. I don't know whether it's going to be this quarter or the other one. But it's going to get there. I'm not worried about that. I'm worried about doing a good sale and good deal for the Company.

 Should we expect more relevant sales throughout the year, especially in the northeast? I think it's fair to assume and to expect more sales. But we are definitely working on those. Whether they are gong to happen within the next few days or the next months is a question of negotiation strategy. But, definitely, we're looking into this.

 And, as I said before, I do believe it's a good year to actually rotate our portfolio more aggressively. Let's see how this plays out. But I do believe it's a god assumption to make that we're going to be selling more farms throughout the year.

 So, I answered the questions we were asked before. So, if you have anymore now, we can move to them. Or I will just do my final considerations.

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Operator   [9]
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 Okay. Sir, I will check one more time. (Operator instructions). The next question comes from [Rodrigo Ogoburu] of Morgan Stanley. Please go ahead.

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 Rodrigo Ogoburu,  Morgan Stanley - Analyst   [10]
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 Good afternoon. You mentioned with the current grain situation, some opportunities may arise to find attractive opportunities to buy land.

 What would be the regulatory situation for Brasilagro? Would he be able to buy land in Brazil under the current land law? Is there a way to find a way around to keep on buying land? Thank you.

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 Julio Toledo Piza,  Brazilagaro Companhia de Propriedades Agricolas - CEO   [11]
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 Hi, Rodrigo. Thanks for the question. I do believe Brasilagro is a Brazilian company. It's been incorporated in Brazil, founded in Brazil, listed in Brazil. So, by any means, we do believe we are a Brazilian Company. But, of course, not saying everyone would agree with that. But that's our current understanding.

 But we are very inclined to do that and to be sure. And we are very much -- very much agreeing that we are a Brazilian company and we could go out and do it.

 Nevertheless, we might do it directly. We might do it through a partnership. There are several ways we can do it with higher or lower degree of certainty on that. I'm not worried specifically about that.

 What I'm worried about is to find the right opportunities for the Company. When those opportunities are there, we're going to find a way to do it. Either it's going to be Brasilagro directly or through a partner, whatever we feel is the right thing to do at the moment.

 What we are looking for is the right opportunity. And then the right structure will be the one that everyone feels comfortable about.

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 Rodrigo Ogoburu,  Morgan Stanley - Analyst   [12]
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 Thanks, and if I may just follow up on that. Do you think that even the severe drought in the northeast there would be some attractive opportunities there to buy farms from some distressed farmers?

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 Julio Toledo Piza,  Brazilagaro Companhia de Propriedades Agricolas - CEO   [13]
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 Rodrigo, definitely. I think not only from farmers, but I do believe this is the first time in Brazil that we have an important drought and a very sincere drought in the northeast of Brazil after more -- I'll say -- corporate investments were made in Brazil. So, this will be an interesting thing to see how those players would behave in such conditions.

 We always know that farmers, in general, are very resilient in selling their farms in distress, that has been the case. But this time might be a little bit different as you have a series of small corporations that were put together and bought farms in the northeast of Brazil in the last three, four years.

 So, it'll be very interesting to see how those small corporations will react to that. And those can be very interesting opportunities for us.

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 Rodrigo Ogoburu,  Morgan Stanley - Analyst   [14]
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 Thanks, Julio.

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Operator   [15]
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 I'll turn over the conference to Mr. Julio Toledo Piza for final considerations. Mr. Piza, you may give your final considerations now.

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 Julio Toledo Piza,  Brazilagaro Companhia de Propriedades Agricolas - CEO   [16]
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 Thank you. Thank you all for being with us. We're looking forward for the next quarter. Then, again, we plan to do a more detailed presentation on all the provisional metrics of the Company. We can discuss productivity, yields on sugarcane and soybeans, once we have a complete set of pictures from this year.

 I'd also like to say that it's been a tough year from the operational side. The drought in [Biaia] and Piaui. But, on the other hand, the Company has produced significant real estate results.

 And I guess this is our vision and our history in the Company. We are a real estate Company that looks for land development. And on that side, we keep on delivering fantastic results.

 Of course, by doing so, we expose ourselves more on the operational side. And that is part of what we do. I think it's important that we keep on developing land. And, of course, there will be more exposure -- exposed to the weather. But by doing so, we will be showing that we can deliver sustainable attractive returns to our shareholders.

 So, tough year. But so far, very good returns in general. So, thank you very much. See you on the next quarter.

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Operator   [17]
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 Thank you. This concludes today's' Brasilagro's third quarter 2013 results conference call. You may disconnect your lines at this time.




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