Q2 2016 Brasilagro Companhia Brasileira de Propriedades Agricolas Earnings Call

AGRO3.SA - Brasilagro Companhia Brasileira de Propriedades Agricolas
Q2 2016 Brasilagro Companhia Brasileira de Propriedades Agricolas Earnings Call
Feb 05, 2016 / 02:00PM GMT 

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Corporate Participants
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   *  Julio Piza
      Brasilagro Companhia Brasileira de Propriedades Agricolas - CEO & IRO

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Presentation
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Operator   [1]
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 Good morning. Welcome everyone to BrasilAgro's second quarter 2016 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 recorded. (Operator Instructions)

 Before proceeding, let me mention that forward-looking statements are based on 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 would like to -- I will turn the conference over to Mr. Julio Piza, Chief Executive Officer. Sir, you may begin your conference.

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 Julio Piza,  Brasilagro Companhia Brasileira de Propriedades Agricolas - CEO & IRO   [2]
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 Hi, everyone. Thanks for joining our call today, our second quarter fiscal year 2016. We can move on to the presentation.

 On page 2 we have the highlights of this year. Net revenue a little over BRL100 million in the semester and net income close to BRL46 million. Adjusted EBITDA, a little over BRL18 million. And also not on the fiscal, on the two quarters, but on the whole calendar year of 2015, we supplied over 1 million tons of sugarcane. And I'm going to talk a little bit more about that.

 But before we get into the details, on page 3 we have soybean price evolution. And this is a chart that we've been following for a while and during this analysis. And you can see that one of the lines is the, green line, is the price in reais and the yellow one is the price in dollars. And until a year and half, two years ago, the prices in reais and in dollars were very close, or were moving on the similar pace and since then, they have been sort of decoupled.

 So, now we have the soybean prices in reais on the highest level and the price in dollars on the lowest point in the last five years. So this is an interesting situation. The full impact of it hasn't been through the whole system yet because most of the soybeans that were planted on this season, its cost structure was formed using a lower exchange rate. So it should have some issues when this whole thing is going to stabilize. So, next year we're going to have a better picture on what the full impact of this.

 But it's interesting to note that the exchange rate has been beneficial for the sector as you have your revenues growing in reais because of the exchange rates, since the soybean kind of stopped moving around $8.50 and $9.00 a bushel. That's the range. It hasn't come down from that level yet -- or not yet, it hasn't come down.

 And your cost structure is only partially affected by the exchange rate. So that leads to a margin that is still okay, probably not as high as it was before, in the last few years, but it's still a good margin, this year especially. For next year, we're going to wait and see what happens in cost and everything, but it's still a solid margin.

 That leads to page 4 in which you can see how land prices have evolved in Brazil, this FNP report. And you can see the land prices have stabilized which was kind of expected given all the macroeconomic situation and given the lower soybean prices in dollars stabilizes. We have been talking about this for a while. And we can expect price, as you have very low liquidity in the market right now, very few deals are happening.

 I do expect some price in some regions to even come down. But we still have somewhat of a fundamental to support some of the prices we are seeing right now. And I am going to talk a little bit how it is on the sugarcane operations of ours.

 Moving to the next page, page 5, I am going to talk about this year's campaign that has been planted. We have two regions for soybean and corn which is Piaui and Bahia. And on both regions we have had a very strong impact from the El Nino. So we had a very dry December and actually in Piaui, we haven't had any significant rain. So, it stopped raining for over a month, which is kind of rare. We haven't seen that kind of situation in the last eight years.

 And even in Bahia, we did have some, but way below historical levels. That in January has been pretty humid, pretty wet, so it's been recovering. But that led to a postponing of the planting overall and even some replanting that we had to do in Piaui.

 But the most important impact that we are seeing is that we took advantage of our flexibility. You know that we contract services instead of owning our own machinery; therefore we have a high degree of flexibility. By transforming fixed costs into variable ones we were able to adapt very fast to the scenario. So what we did is that we decreased planted area, especially and mostly on new areas.

 As you all know those new areas, which are kind of our bread and butter activity to develop the land, we looked into that and saw those -- because of the postponing those areas were to be planted not in the ideal situation, in the ideal time period. Therefore, we decided to not plant on those because they already have a low productivity, because they are new; and it was too risky to actually keep on doing it outside of the proper time period.

 So, we reduced that and also we did some changes in terms of exchanging soybeans to corn, as corn is less sensitive to this change in the planting period. So, we did some adjustments and I think that we are very happy that we were able to do that. I think it proves our system of being highly flexible, pace off when you have these type of situations.

 And given that we are actually reducing areas that are new, from an overall mix perspective, we are not expecting a significant drop in yields as of now. Of course, you have to wait to see what is going to happen. But as of now, we are, because of the exchange in mix, we should be close to our budget. But again, it's going to be the weather in February, March and even April will be important for us.

 On page 6, that's our sugarcane result. As you know, the sugarcane harvest happens -- does not coincide with our fiscal year. So 2015 part of the sugarcane was part of our last year's results and part of it will be in this year's results. But here we can have a picture of what actually happened this year.

 And we are extremely proud of what we did in sugarcane. We think the Company has evolved tremendously in the last seven years since we started doing this. From an operational perspective, we are getting better and better. We've been cracking the code to produce sugarcane on the new regions and the results are just outstanding.

 On top of over 1 million tons, we have had yields of 96 metric tons per hectare which is way above Brazil's average, way above Sao Paulo state average. So, it's a tremendous result. Even so, because this sugarcane rate has -- it is an old one, so the average age of it is over four years. So, it is a fantastic result, we are very pleased with that.

 And coping with another [descent] above Brazil's average, sugar content of almost 138 kilos per ton of sugar content delivers a fantastic result. So, we are able to -- understanding the varieties, the planting window, everything, the harvesting, so it keeps getting better and better.

 And of course while we are using here BRL0.53 for the ATR price, which is the numbers that we used in our financials, but actually we're expecting this number to be even a little higher, probably going to be closer to BRL0.55 or BRL0.56 as you end the sugarcane cycle on March 30. We're going to have then the final average price, weighted average price for the year and those are going to be even higher than that. But even using this BRL0.53 the [hectare] there is already putting out a net income of almost BRL2,000 per hectare, which is a very good number, which supports the valuations we have had on the [already sold] farm and of course supports valuations going forward. As you are generating over BRL2,000 per hectare, you can have land values close to BRL40,000 or BRL50,000.

 So, we're pretty confident that the region is good and it's one of the reasons actually we increased our total sugarcane exposure in this region. We are extremely pleased and we are hoping to increase even more in the near future.

 On page 7, we took advantage of those volatilities over the last six to seven months and we've been able to put up a hedge position that is pretty solid. So we've a little over 50% of our soybean, the price is already fixed, which is good given all the unstable weather. El Nino, we have to be careful not to be over hedged.

 But our price is 7% above current markets at $9.37 per bushel; and our exchange rate is also above current level at BRL4.01, and we have 60% of the FX already hedged. So, by taking advantage of this volatility, we have been able to create a very good hedging position for this year.

 On page 8, our discussion on EBITDA and adjusted EBITDA -- always pointing out that we try with adjusted EBITDA to give you guys the best understanding of our operational results. So, we try to get the [regulatory] down and remove all the biological assets' effects, which are not actually -- which do not belong to the provisions for the period in question. And also we bring back all the financial results that are related to the operational activities of that period.

 So, by looking at adjusted EBITDA, we are again very pleased: the Company on the quarter close to BRL8 million and on the six months that just ended at BRL18.2 million, which is significantly above last year's and puts the Company on track to generate cash and positive EBITDA even without selling farms, which is a great achievement for us, because we've been reducing and we've reduced the planted area to last year's given that we sold a very large farm and a highly productive farm. So even without that farm, we've been able to keep on growing our EBITDA. So, it's a pretty good result and goes back again to our ability to adjust the Company costs and direct structure to accommodate our business model.

 So even by reducing area which will eliminate all the costs associated with the previous farm, the farm that we sold, so it is a fantastic result given the fact we reduced planted area. So extremely pleased the Company is on track to have a great year again.

 On page 9, our income statement. On the six months, we have a total of BRL45.8 million and even on the quarter, we had a positive net income. You have to remember that we have a very heavy depreciation schedule given the fact that we have to depreciate all the investments you put up on the land. That's a very -- it's only Brazil; it's accounting rules that require that. But it's a fact, you have to deal with it. So by having all those massive investments that we do, we have to deal with the depreciation which hits our bottom line significantly and systematically.

 But even with that we are on the positive track on net income for the year and again without having any farms sold yet. So it's a pretty good result and we are in line again to deliver a positive and important net income that will enable us to pay out dividends and do all the things that that enables us. So all these together when you think about the EBITDA that we are achieving and thinking about the net income, it puts the Company on a different stage, a different level.

 We've been telling this story of our Company in the last seven or eight years, telling that we started as a cash-only company, creating operations from scratch; and to do what we do to (inaudible)still deduct, that's -- it's going to be tough for the first few years but then the results are going to start showing up, so bear with us. And now we are here. So the Company definitely has reached a new level in terms of net income, EBITDA and we are quite pleased to have achieved that.

 And you can see that on the next page, on page 10, on our balance sheet, that our net worth has gone up even, so we had an important dividend payout. We keep on growing our net worth. So we started this Company without any accumulated gains and other things, zero, that kind of had no history; and now we've been able to start building up net worth which is [still here] again. Again, it shows how the Company is evolving.

 The only other thing that is worth mentioning here is that we reduced debt. You can see that it went up significantly from June 30 to December 31. So we reduced debt significantly which is a very conservative approach on our side.

 That should increase a little now. We were able to in the last week to close on some financing using Northeast funds which are quite cheap. So that will show up in the next quarter. But, again, a very conservative approach on our side on these times of uncertainty.

 So, guys, that's what we had to mention. We can move now to Q&A. Thank you.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) I will turn to Mr. Julio Piza for final considerations. Mr. Piza, you may give your final considerations now.

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 Julio Piza,  Brasilagro Companhia Brasileira de Propriedades Agricolas - CEO & IRO   [2]
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 Thank you. Thanks everyone for joining us. I think it's been a pretty good year so far and as I said before in the conference in Portuguese, Brazil right now is in a very tough situation and certainly we are concerned about the political and economic situation of the country and I think we are very concerned. There is not much I can say about the volatility in the markets and everything else.

 But as managers of this Company, we are quite pleased because we've been preparing ourselves for this in the last few years. So now the Company is in a fantastic position to take advantage of what's happening. We have a very strong balance sheet, a very strong cash position, we have been able to adapt ourselves and reinvent ourselves operationally over time. So I think the Company is super well positioned to deal with the situations that we are facing in Brazil. So, we are quite pleased as managers although concerned as victims.

 That's what we had for this semester and hope to see you again in the next quarter. Thank you.

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Operator   [3]
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 Thank you. This concludes today's BrasilArgo's second quarter 2016 results conference call. You may disconnect your lines at this time.




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