Q3 2014 Brasilagro Companhia Brasileira de Propriedades Agricolas Earnings Conference Call (English)
May 09, 2014 AM EDT
AGRO3.SA - Brasilagro Companhia Brasileira de Propriedades Agricolas
Q3 2014 Brasilagro Companhia Brasileira de Propriedades Agricolas Earnings Conference Call (English)
May 09, 2014 / 05:00PM GMT
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Corporate Participants
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* Julio Piza
BrasilAgro - CEO
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Conference Call Participants
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* Paulo Varassi
Brazil Ploro - Analyst
* Thiago Duarte
BTG - 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 2014 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.
Should any participant need assistance during this call, please press star-zero to reach the operator.
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 Piza, Chief Executive Officer.
Sir, you may begin your conference.
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Julio Piza, BrasilAgro - CEO [2]
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Thank you.
Hello everyone. Thanks for joining us in our third quarter call. If you can move to the presentation and start right away.
On page two, highlights for the quarter, net revenue is up BRL7.1 million, adjusted EBITDA of BRL2 million, and the sale of over 24,000 hectares in Paraguay for $15 million.
And we go over the details in the next pages, but to begin with, a little bit on soybean prices and scenario. Still a lot of volatility, prices run up significantly in the short -- in the short term, in the last few months, mostly because of a short squeeze (inaudible) physical side in the U.S. We've seen some basis pressure in Brazil. So the basis (inaudible) has increased.
There's a discount in Brazil today. But nevertheless, we are operating with prices today which are above the historical level. We're still at the $14 a bushel, which means we continue to have an important cash flow for farmers in Brazil, especially on soybeans. That might not be the case for corn, but the harvest -- the corn harvest is still going on and (inaudible). They�re still being developed, so we haven't felt any kind of movement on that side yet.
But on the soybean side, margins continue to be strong and of course when we move to page four, the reflection of that strong cash flow performance is that land prices continue to be at high levels, and they continue to grow. And as you can see from the latest FNP land prices analysis, that throughout Brazil land prices continue to go up.
As I think we said and discussed before, there might be some over-shooting here or there, but overall chances that margins are strong and the floor is sustained [base] price level.
We said perhaps some regions are overpriced. Some regions are underpriced. But overall economics of the sector continues to be very strong. The question that remains to be asked and to be answered is: what's going to happen next year? And we look into the forward prices. That continues to be the case, and it is something that we're going to have to wait and see how this evolves over the next 12 months or so.
On page six, moving to the sale in Paraguay, here we have the map of the farm that we sold -- that vertical stripe, which is roughly 24,000 hectares. And we sold it for $600 and land that we bought at $250. And this is the payment schedule. And it's important to notice that this transaction hasn't been accounted yet, so it hasn't impacted Cresca�s books in Paraguay and therefore it hasn't impacted our books in Brazil.
It will only be accounted for when we transfer the [debt]. And this could happen within the next 30 to 45 days, I would assume, and the moment it is accounted for, it will affect Cresca�s books in Paraguay and ours in Brazil. So it's still not part of the result we have seen so far.
I think it's important to go over the reasons behind selling this -- this portion of the farm. (inaudible) first of all, it is important to have all the people developing the region. It's a very large farm and it's going to take several years to fully develop it. And the fact that you're going to have someone else there helping us develop and creating a more -- more operators and more production coming out of the region, it helps to develop it. It helps to appreciate and make it a better region.
So it is important to have other people doing what we do there. That is the first reason.
The second reason, it is an important -- it is an important cash flow for the company. And Cresca, we have an ambition to keep on developing it. It's a lot of hectares. It's a lot of money to pour into that operation. So as those operation starts generating some cash there, this is extremely positive. So we didn't have to transfer more money out of Brazil to that operation.
So, we're extremely pleased to have this operation to be self-sustained over time.
And a third element, which is also important to say, is that, as you all know, this has been or this was a related [party] transaction back in December. And we gave all the transparency about it. We discussed extensively and we went over all the details in terms of maintaining the highest degree, the highest level of corporate governance.
And I feel then for a few months, we can sell it at a premium, which somehow validates all the discussions that we had in December. We're extremely positive for BrasilAgro shareholders.
Fourth, eliminating any potential doubt that would still be there as how good it was for BrasilAgro to do it. So that is the state of Paraguay. On page seven, and now we are pleased to say, now we are talking about Brazil and Paraguay when talking about our operations. So we had a total planted area of 80,000 -- over 80,000 hectares. And this is interesting because Paraguay starts planting late December and goes all the way into February. So we still have to wait until this quarter to actually have a final number on our planted area.
So we planted over 80,000 hectares and that's the breakdown between the farms. And you can see in Cresca almost 11,000 hectares already in production there. In Brazil, the harvest of soybean is 95 percent concluded. And I -- we won't disclose any specific (inaudible). We will want -- we want to wait until we have it all done to discuss it with details. But I can anticipate to you that in Piaui we are having above expectation yields. So it's pretty good and above what we expected. And in Bahia, they are below what we expected.
Definitely some -- some impact from the drought in Bahia and it's incredibly volatile depending on the portion of the farm. So we have had 3.5 tons per hectare soybean and on same farm, we have had 1.5 tons per hectare.
So it's incredibly volatile this year, but overall Piaui above expectations, Bahia below expectations.
In Paraguay, we have started already harvesting 17 percent, and it's been proven to be a very good year. We're extremely pleased so far. So far, we're way, way above expectations. Of course, things can -- do change. We're still in the early stages of harvesting there. We still have some soybean growing in early stages of reproductive stage. Soybeans that will harvested only a month-and-a-half from now.
So, we do have to wait sometime to be sure, but things are looking pretty good in Paraguay. We have had yields of plot at 2.6, 2.8, 3.0, reminding everyone that the cost to produce there is less than a ton per hectare. So pretty good margins. We�re so far extremely happy with Paraguay.
So overall, this has been our operating performance. And, of course, comes our fourth quarter, and our discussion -- and our call in the fourth quarter, we're going to be going into the details on the specific yields, productivities, depending on the level of development of each plot. And -- and also it's always good to remember that we sold a great deal of land last quarter, so -- or last year.
So when we compare all the things that we were doing this year to last year, it's always important to remember that we took out over 10,000 hectares of prime land, fully developed land, and replaced it with new land. So there's always an impact on yields and volatility because of that.
Having said all that, let's move to page nine. That is our hedge position as of May 1st. We are above current levels on exchange rate and below on -- on -- on the soybean price in Chicago that is still above our budget in terms of what we expected from the year.
And most of it is already sold. There is a question of finalizing the delivery and actually settlement of the contract.
On page 10, our EBITDA, always good to remember that we adjusted for what we believe delivers the best proxy for cash generation, so we move all the biological assets implications of it, and that's pretty much what we do. So, making sure that everything relates to operational performance and we don't have any future estimates in it.
And our third quarter have BRL8.5 million, which is a significantly better position than last year's, which were close to [2]. On a nine-month perspective -- oh, sorry -- our third quarter last year was minus BRL700,000. So this is a significantly better position.
If you do a nine-month comparison, we are below -- we are BRL2 million. Last year we were at BRL20.5 million. But last year, there was over BRL26 million of EBITDA coming from farm sales, which hasn't happened yet. It will soon enough. But it hasn't happened yet.
Therefore, the (inaudible) operation, there is no farm sales embedded in it. So it's pretty positive. We�re happy that it is still generating positive cash flow regardless of farm sales. And important to say, after selling farms we sold last year, we are worse off in terms of maturity of our farms on this crop than we were last year's. So, we are, I wouldn't say happy, but (inaudible) OK results, especially in Piaui. We're happy in Bahia not so much, but overall numbers seem to be good.
Income statement, (inaudible) represents most of the difference between what happened last year and this year. Another impact that is to go into the details, you'll find is that sugarcane revenues went down. Part of it is explained by a little bit lower -- a lower yield per hectare because it's an older sugarcane reed.
But the majority of the change is due to an accounting issue, or how -- or when we did the harvest, the year before most of the sugarcane we harvested in the second semester (inaudible) was captured into our fiscal year. And this year, our last -- the season before, and last year it was spread all over the harvest season. Therefore, in 2013, we had a significant amount of 2013 fiscal -- had a significant amount of sugarcane that belonged to the previous crop. And that actually distorts the results a little bit.
But apart from that distortion, our farm sales are actually growing. Our results as you can see, for instance, revenue from grains going up 20 percent, which reflect much better yields this year than we had last year.
But just to make sure, the most important difference we have here is that better operational results, and we don't have any farm sale, and that would explain the vast majority of the differences between last year and this year.
On our balance sheet, it is the same story. Always good to remember, and we cannot stress it enough, that all the properties that we have, all the farms are accounted for property for investment, and we carry them all at cost -- acquisition cost below the appreciated investment. So there is no -- there is no adjustments. There is no results. There is no [immature] impact based on land appreciation in our books.
In a nutshell, that's what we had to tell you guys. And we can move to Q and 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. If you have a question, please press star-one on your touchtone phone at this or any time.
If at any point your question is answered, you may remove yourself from the queue by pressing star-two.
Questions will be taken in the order they are received. We do ask that when you pose your question, that you pick up your handset to provide optimum sound quality. Please hold while we poll for questions.
The first question comes from [Paulo Varassi] with Brazil [Ploro]. Please go ahead.
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Paulo Varassi, Brazil Ploro - Analyst [2]
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Good afternoon, Julio. Thank you for the question.
You mentioned earlier in the call that you thought there were some regions in Brazil that were overpriced and some that were underpriced for land. I was hoping you would be able to elaborate on that, and be a bit more specific, if possible. Thank you.
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Julio Piza, BrasilAgro - CEO [3]
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Thanks for the question.
I do believe beyond prices -- there are two components to it, right? There is, of course, as any other asset, there is a -- there's discount rate and there is a earnings or cash flow on it. I'm assuming that your discount rate is fixed.
You have 2 trillion (inaudible) whether your earnings are recurrent, or somehow in a distorted moment. And I -- perhaps some regions of Brazil started trading farms on a multiple base on earnings that might not continue to happen before creating some distortions in the short term. Meaning you are paying for cash flow that happened -- just happened, but it's not likely to continue to happen in the future.
So, that kind of distortions could happen and they do happen. Whereas, in other regions, you might be -- negatively affected by the cash flow, by something that is likely to change and will not happen again.
I'll give you one example, and then you can draw your own conclusions out of it. We know -- all know that, for instance, the sugarcane business has been through a very rough time in the last few years. Before, one can say that cash flows from that activity -- from planting sugarcane -- has been depressed. Is it likely to keep at that level for the future? I don't think so. If you look into what happened in the last 20 or 30 years in different cultural cycles, things will adjust. They have adjusted, and they will adjust again.
So, as long as you have a protective farm that you know is well positioning across curve, I think it's likely to assume that your cash flow from a sugarcane operation is likely to go up, and not down. And perhaps our prices are now reflecting that.
Moving to the other side of the -- of the spectrum -- in the last two years, Brazil has exported a great amount of corn. And Brazil did sell because corn prices were at a level that Brazil was allowed to export. So, the world, in general, needed Brazil's corn. Otherwise, it couldn't meet its demand against U.S. and a drought in so many other regions. But through the fact of the matter, Brazil needed to export. And, actually, last year, Brazil exported more corn than U.S., which is something that I never thought I would see in my life. But it happened. And because it happened, corn prices were at a very high level.
The question then remains, the cash flow generated from that corn -- is it likely to continue to happen every single year? I think it's most likely not. It could, of course, again. But it most likely is not to continue to happen.
So, if you have farms being traded, and the earnings expected, or the implied earnings, had that corn cash flow. And it -- there might be another price there.
So, the question is, what kind of cash flow would you use to price your farm? And you have to be very conscious if you're using the right cash flow, because it's going to be impacted by short-term volatility, and we've seen regions in Brazil that are truly using the short-term to derive asset prices, and then can generate under and over pricing.
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Paulo Varassi, Brazil Ploro - Analyst [4]
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Very clear. Thank you.
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Operator [5]
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The next question comes from Thiago Duarte with BTG. Please go ahead.
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Thiago Duarte, BTG - Analyst [6]
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My thanks. Julio, it's been almost a year since your last, you know, internal appraisal on your farmland value, and I appreciate your comments on -- on how you see the trends for farmland value in Brazil and the comments that you put in the presentation. So, just wondering if you were -- if you were to do a new appraisal this year, what sort of -- what sort of a price appreciation would you expect to see at this levels based on -- you know, on the trends of the last almost a year?
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Julio Piza, BrasilAgro - CEO [7]
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Thanks Thiago for the question. It's a very tough one, given the fact we don't give out any guidance.
I do believe our portfolio has appreciated, and I do believe it has appreciated mainly because we developed more of it.
I think land prices in Brazil in general went up. But our portfolio has appreciated because we developed a great amount of land this year.
It's very hard to say. We are working on a new -- new appraisal that should be out pretty soon, and then I think the number's going to be there for everyone to see. But I'm positively sure that we are way above the double digits from last year.
High in the double digits. So.
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Thiago Duarte, BTG - Analyst [8]
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OK great, that's going to be very helpful. Thank you.
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Operator [9]
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Again, if you have a question, please press star, then one.
As we have no further questions, this concludes our question and answer session. I will turn the call over now to Mr. Julio Piza for final considerations. Mr. Piza, you may give your final considerations now.
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Julio Piza, BrasilAgro - CEO [10]
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OK. Thanks, thanks everyone. It's been a pleasure to have you here. It was a short call as we are still in the middle of our fiscal year, and as always, I would like to preserve most of the detailed discussion after we can finalize our cycle. Even though part of it has already happened, all the harvest and everything, we still need a few more months to end our crop cycle so we can actually go into the details for yields, for results, for land prices, and everything else.
So I guess I'll see you back in a few months. Thanks for joining.
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Operator [11]
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Thank you. This concludes today's BrasilAgro�s 3Q '14 results conference call. You may disconnect your lines at this time.
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