Brasilagro Companhia Brasileira de Propriedades Agricolas - Acquisition of Assets in Paraguay - Corporate Conference Call
Dec 20, 2013 AM EST
AGRO3.SA - Brasilagro Companhia Brasileira de Propriedades Agricolas
Brasilagro Companhia Brasileira de Propriedades Agricolas - Acquisition of Assets in Paraguay - Corporate Conference Call
Dec 20, 2013 / 05:00PM GMT
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Corporate Participants
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* Julio Toledo Piza
Brasilagro Companhia Brasileira de Propriedades Agricolas - CEO
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Conference Call Participants
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* Desalvio Gregori
- Analyst
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Presentation
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Operator [1]
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Good afternoon. And welcome, everyone, to Brasilagro's Conference Call to Discuss the Acquisition of assets in Paraguay. 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 the 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 Companhia Brasileira de Propriedades Agricolas - CEO [2]
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Thank you. So let's start with our call about our recent acquisition. So we're going to move to page three of our presentation. I don't know why three is the first one, but, anyway, it is. First of all (inaudible) some information on Paraguay. Not everyone is familiar with our neighboring country.
It's a rather small country, a little bit over 6 million inhabitants, around $26 billion in terms of GDP, sits right on the border of Brazil. And one interesting fact about Paraguay that very few people know, that is Paraguay has had the same currency over the last 70 years without devaluing or attaching zeroes. It's actually the only South American country that has done so. So it's quite interesting. It's actually a neat country.
If you move to page four, you can see it's rather small, medium level GDP per capita, but it's growing a lot recently. It's very tied to Brazil. And when I look into page five on a geographical perspective, you can pretty much -- you have two sides of the same country. You have the eastern part of the country, where you have 40% of the total area, and 97% of the population. And you have the western part, where you have 60% of the area and just 3% of the population.
And this is a very relevant information for us, because when you're operating very large farms, it's very important to be located on sparsely populated areas in order for you to amass a large amount of area. It is important that you do not displace people, so your operation is sustainable and you don't face social and political risk. So the farms we've acquired are located in the western part (inaudible) roughly 500 kilometers northwest of Asuncion, which is the capital.
On page six, this is a business environment rank done by Getulio Vargas, which is an important Brazilian University. And it actually ranks Paraguay second in terms of business environment. And this is a combination of tax system, legal system, the ability to open and shut down a business, and the whole bureaucracy in place. So the country's actually pretty pro-business. And, again, of course, you have (inaudible) related to it, but, again, it seems to be (inaudible) very pro-business country.
On page seven -- and that becomes -- you can see very interesting. When we start discussing agricultural side, Paraguay is the third-largest agricultural producer in South America and is the fourth-largest exporter of soybeans in the world.
And actually, when I looked into USDA data, they put US, Brazil, Argentina, Paraguay, and rest of the world. So Paraguay actually had made into the USDA radar as an important soybean producer.
And if you look into the bottom of page seven, this is in million of hectares for soybeans. And you can see that Paraguay actually last year planted more hectares of soybeans than Goias in Brazil (inaudible) altogether, which are those Mapitoba, which are basically the expansion region in Brazil in the northeast. So Paraguay is a rather important soybean producer, so it is an important agricultural player. And we are entering in that specific market.
On page eight, a description of the deal. So what we did, we acquired a participation in a company called Cresca. Cresca was founded in 2008. It's a joint venture between Cresud, which is our controlling shareholder, and a company called Carlos Casado, and that company has over 45,000 hectares of farmland in Paraguay, of which almost 22,000 are arable, and roughly 12,000 have been developed so far.
Also, Cresca has an option to expand -- actually, the right way to say it, had an option, because it has been exercised already -- to expand this area to over 140,000. So this option is for another 96,000 hectares of land, and that option has a price, an exercise price of $350. So we're talking about a total amount of area of, really, around 142,000 hectares, of which 70,000 are arable. This is on page eight of our presentation.
So that's the company. It has 46 (inaudible) options (inaudible) up to 142,000 hectares. And it's owned 50% by Cresud, 50% by Carlos Casado. What we did, we bought Cresud's stake in this company. And, also, because Cresud has managed the company and put all the knowledge behind -- or how to operate and manage the company effectively, providing services, also Cresud is entitled to a management fee contract that Cresca is paying Cresud. And also Brasilagro is taking over that.
So on a simplistic -- and on a simple way, what we're doing is that we are replacing Cresud in this deal. Cresud now owns 50% of Cresca. We have exercised the option already, so we haven't paid fully yet, but now Brasilagro is the owner of it and we are managing the company, and we're going to be receiving a management fee.
Before we go into the details of the transaction on page nine, let me describe a little bit the farms. So as I said before, the farms are located 500 -- roughly 500 kilometers northwest of Asuncion, which is the capital of Paraguay. You have the map of the farm. The whole region, it's been developing very, very fast, mainly with cattle. We have cattle on the farm and (inaudible) for soybean and corn and sorghum, but the whole region, it's developing very fast. And it's a very interesting region (inaudible) going to show you why it's an interesting region.
From a logistics perspective (inaudible) actually all located -- for those of you [who doesn't know], you have a port in Asuncion, a river port in Asuncion, where you can actually use barges to reach the Rosario port in Argentina. So, actually, the current price of soybeans at the farm is actually higher than those of our farms. I'll give you an example here. In the farm right now in Paraguay, your soybean price would be Chicago minus $81 a ton, whereas in Bahia today, you have Chicago minus $90 or $95 per ton. So it's well located from a logistics perspective.
And also, from a production perspective, it's quite different and interesting. On page 11, I'm talking about fertility and rainfall, and I'm comparing Paraguay to Bahia. This is (inaudible) most of our area here in Brazil. And Paraguay has a much higher fertility, actually -- especially, for instance, if you look into pH or you look into phosphorus, and it's really incredibly fertile soil. You don't have to put any fertilizer to grow soybeans. You don't have to do any kind of [long stem] correction. It's ready to be produced.
Just to give you an idea of how much this is valuable, if we were to add the same amount of phosphorus we have in Paraguay to our farm in Bahia, it would cost us roughly $4,000 per hectare just in terms of phosphorus. Of course, the caveat to that is that Paraguay in that specific region has a much lower rainfall level.
So we do have some volatility, some weather -- we might have some weather issues when we're producing. But, again, if you move to page 12, you'll see that the cost -- the direct cost to produce is much lower in Paraguay, because it is [no fertilizers]. We also have some labor costs which are greatly reduced; income taxes are lower, a bunch of other stuff. We don't have any kind of revenue-related taxes when we are producing.
So what happens is that your breakeven yield is way lower in Paraguay than it is in Bahia, for instance. So even though you are working with a more volatile environment, you need to produce a much lower amount of soybean to break even, which it is interesting, because you could actually (inaudible) when you think about how the farm would add to our portfolio, it adds a significant amount of fertility, which is a different story from the other ones we have.
So by adding these farms, we are, for instance, if one would think that soybean prices could go down next year, that region is much better prepared to handle lower prices than some regions of Brazil. So that adds a level of diversification to our portfolio that is quite interesting.
So moving back to page -- moving forward to page 13, this is the deal structure. As I said before, Cresca owned 50% by Cresud, 50% by Carlos Casado, and a management fee contract remains between Cresca and Cresud. After the deal, Brasilagro owns 50% of it, Carlos Casado 50%. This was the only asset Cresud had in Paraguay, and now it's Brasilagro's.
Brasil, it agreed to pay $18.5 million for the 50% stake and the management contract, and also it paid (inaudible) for the option to increase. But we agreed on that if we are to sell up to 24,000 hectares of undeveloped land on that farm within the next year, we're going to pay Cresud a percentage of the deal, of the gains of the deal, 25% of (inaudible) fee of which exceeds $350 per hectare, which is exercised (inaudible) option. But other than that, the option (inaudible)
This deal has been approved by our Board of Directors. Only the independent members voted on it. It was a unanimous decision. And all the Board members that were appointed by Cresud abstained, so they didn't vote. So it was only approved by the independent Board members according to the practices in terms of corporate governance.
And also because it's such a small deal, and you can see that on page 15. It represents less (inaudible) of our net worth. And we represent what we did acquisition from Cresud represented roughly 3.5% of our net asset value. So although it represents a lot of hectares, represents a new growth avenue for the company, it is still a small portion of our net asset value that is being actually deployed to a different country. So that is the reason why we took -- we approved that the Board would not need to call a shareholder meeting for it. It's a small deal.
But it represents a lot to us as it opens up an incredible opportunity for us to grow, to grow outside of Brazil, to diversify our portfolio, and to improve our land bank dramatically and more than doubling the land bank of the company, positioning the company quite well for the next years to come in terms of land to be developed.
So in a nutshell, this is what we have to present. And I can look to Q&A now, and I can -- I'm more than happy to go over any details any one of you might have.
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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 [Desalvio Gregori]. Please go ahead.
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Desalvio Gregori, - Analyst [2]
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Yes, hi. Thanks for the call. My question would be regarding, I guess, the management fee that Cresca's going to pay for Brasilagro. Could you give us an idea of how much that's going to be per year?
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Julio Toledo Piza, Brasilagro Companhia Brasileira de Propriedades Agricolas - CEO [3]
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Well, thanks for the question, Gregori. It is dependent on the amount of investments and on the gross profit of the company. But (inaudible) to give you an idea it represents roughly 10% of the investments made that year, so all the CapEx that is made to develop a farm, 10% of it goes -- the fee for Brasilagro, from Cresca to Brasilagro, and roughly 10% of the gross profit for the year. So it really depends on the -- how the year goes in terms of development and results. I don't know if that answers your question.
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Desalvio Gregori, - Analyst [4]
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Yes, it does. But just to make sure, the CapEx -- so when you open up new land at 10% of the cost to open up that land, Brasilagro is going to receive that as the fee, if I understood correctly. Is that right?
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Julio Toledo Piza, Brasilagro Companhia Brasileira de Propriedades Agricolas - CEO [5]
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You did. So, for instance, imagine on that farm we're going to have roughly another 50,000 hectares to develop. If we (inaudible) roughly -- I don't know that's being conservative here, over time (inaudible) $800 per hectare (inaudible) so Brasilagro will get $4 million. Of course, half of it we would be paying to ourselves, so it's only half that is actually net of what we paid.
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Desalvio Gregori, - Analyst [6]
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Oh, okay.
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Julio Toledo Piza, Brasilagro Companhia Brasileira de Propriedades Agricolas - CEO [7]
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Understood?
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Desalvio Gregori, - Analyst [8]
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Yes, yes.
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Julio Toledo Piza, Brasilagro Companhia Brasileira de Propriedades Agricolas - CEO [9]
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Okay, thanks.
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Desalvio Gregori, - Analyst [10]
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All right. Thank you very much.
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Operator [11]
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(Operator Instructions). As there are no further questions, this concludes the question-and-answer session. I'll turn the call back over to Mr. Julio Toledo Piza for final considerations. Mr. Piza, you may give your final considerations now.
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Julio Toledo Piza, Brasilagro Companhia Brasileira de Propriedades Agricolas - CEO [12]
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Thanks. Thanks, everyone, to joining us for the call. And if you have any other questions, we are available at your disposal to answer any one of them. Just get in touch with us, and we'd be more than happy to discuss any other detail or any other doubts you might have. Thank you very much, and have a great holidays. Thanks.
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Operator [13]
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Thank you. This concludes today's Brasilagro conference call. You may disconnect your lines at this time.
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