BrasilAgro's (LND) CEO Julio Piza on Q2 2016 Results - Earnings Call Transcript

| About: BrasilAgro - (LND)

BrasilAgro - Brazilian Agricultural Real Estate Co. ADR (NYSE:LND)

Q2 2016 Results Earnings Conference Call

February 5, 2016 09:00 AM ET

Executives

Julio Piza - CEO and IRO

Operator

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 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 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.

Julio Piza

Hi, everyone. Thanks for joining our call today, our second quarter fiscal year 2016.

We can move onto the presentation on Page 2, they have the highlights of this year. Net revenues a little over R$100 million at the end of this semester, and net income close to R$46 million, adjusted EBITDA a little over R$18 million. And also on the fiscal -- the two quarters, on the whole current calendar year of 2015 we supplied over 1 million tons of sugarcane. I'm going to talk a little bit more about that.

Before we go into the details on Page 3, we have soybean price evolutions and this is the chart we've been following for a while and given these analogies. 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 a year and half years ago, the prices in reais and dollars were very close, although we're moving on the similar pace. And since then there has been a sort of decouple. So now we have the soybean pricing in reais on the highest ever level and the price in dollars on the lowest points in the last five years. So this is an interesting situation. The full impact it hasn’t been through the whole system yet, because most of the soybeans that we've planted on this season, its cost structure was formed using a lower exchange rate. So if you have some issues when this whole thing is going to get 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 the revenues growing in reais because of the exchange rates since the soybean kind of stopped moving around $8.50 and $9 a bushel, that’s the range. And it hasn’t come down from that level yet -- not yet, it hasn’t come down. Annual cost structure is only partially affected by the exchange rate. So that leads to a margin that is still okay, probably as 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 with cost and everything, but it's still a solid margin.

That leads to Page 4, on which you can see how land prices have evolved within the year. This is S&P's report. And you can see the land prices have stabilized, which was kind of expected, given the macroeconomic situation, and even the role of soybean prices in dollars, they're stabilized. We've been talking about this for a while and we can expect prices to have low liquidity in the market right now, rarely few deals are happening. I do expect some prices on rate exchange even come down. But we'll have somewhat of a fundamental to support some of it of the prices we are seeing right now. And I'm going to talk a little always on the sugarcane operations of ours.

Moving to the next page, Page 5, I'm going to talk about this year's campaign that has been granted. We have the two regions for soybean and corn which is Piauí and Bahia. And both regions we have had a very strong impact from the El Niño. So we had a very dry December, naturally in Piauí 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 a situation in the last eight years. And even in Bahia we did have some, but way below historical levels. That in January as we're pretty humid, pretty wet, so it's in recovery, but that led to postponing of the funding overall, and even some replanting that we have to do in Piauí. So the most important impact we're seeing is that, we took advantage of our flexibility. You guys know that we contract services instead of owing our own machinery. And 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 this land, we're looking to grab and solve those because of the postponing. Those areas were to be planted and 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 the proper time period. So, we've reduced that and also we did some changes in terms of exchanging soybean to corn, as corn is less sensitive to this change in the planting period. So, we did some adjustments and I think that’s -- we are very happy that we were able to do that and I think it was our system of being highly flexible pace up when you have this type of situation. And given that we are actually reducing areas. There are new -- from an overall mix perspective we are not expecting a significant drop in fields as of now. Of course you have to wait to see what's going to happen. But as of now -- because of this change in mix we should be close to our budget. But again it's going to be the weather in February, March and even April, is 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 and so 2015 part of the sugarcane was part of our last year's results and part of it will be in this year results. But, here we can have a picture of what actually happened this year, and we are exceedingly proud of what we did in sugarcane. I think the company has evolved tremendously in the last seven years since we started doing this. From an operational perspective it's getting better and better. We have been cracking the code to produce sugarcane on these 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 São Paulo state average, so it’s a tremendous result. And then so because this sugarcane rate has -- it is an old one, so the average age of it is over 4 years. So it’s a fantastic result, we're very pleased with that. And coping with a very decent above Brazil's average sugar content of almost 138 kilos per ton of sugar content -- we've delivered a fantastic result. So we are able to understanding the variety, the planting window, everything, the harvesting. So it keeps getting better and better.

And of course, we are using here R$0.53 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 is going to be closer to R$0.55 or R$0.56 as the year end the sugarcane cycle on March 30th. We are going to have then the final average price, weighted average price for the year and those are going to be even higher than that. The reason we're using the R$0.53, a hectare there is already coming out of net income of almost R$2,000 per hectare, which is a very good number, which supports the valuations we have had on the places we've sold this farm and of course supports valuations going forward as we we're generating over R$2,000 per hectare. You can have around that is close to R$40,000 - R$50,000. So we are pretty confident that the region is good and one of the reason is actually we increased our total sugarcane exposure in this region, I'm 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, seven months and we've been able to put up a hedge position that is pretty solid. So we have little over 50% of our soybean where prices are already fixed, which is good given all of this unstable weather, El Nino, we have to be careful to be over hedged. But, our prices 7% above current market at 9.37, probably usual. And our exchange rate is also above current LIBOR at 4.01 and it has 60% of FX already hedged. So by taking advantage of this volatility we've been able to create a very good hedging position for this year.

On Page 8, I will discuss on EBITDA and the adjusted EBITDA. I was 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 regular EBITDA and remove all the biological assets, effects, which are not actually, which not belong to the provisions for the period in question. And also would bring back all the financial results that are related to that operational activities of that period. So by looking at the adjusted EBITDA we're again very pleased, the company on the quarter, close to R$8 million and on the six months, but just under, at R$18.2 million which is significantly above last year. And plus the company is on track to generate cash and positive EBITDA even without selling farms, which is a great achievement for us because we have reduced the planted area to last years, given that we've sold a very large farm, a highly productive farm to even without that farm. We've been able to keep on growing our EBITDA, so it's a pretty good result and it goes back again to our ability to adjust the company, costs and direct structure to accommodate our business model. So, even by reducing we're able to eliminate all the cost associated with the previous farm, the farm that we've sold. So, it’s a fantastic result given the fact we've reduced planted areas. So, extremely pleased the company is on track to have a great year again.

On Page 9 our income statement, in the six months we have a total R$45.8 million and even on the quarter, we had a positive net income. We 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. It's only Brazil, it’s a colony rule that requires that. But it's a fact so you have to deal with it. So by having all those massive investments that we do, it has 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 enable us. So all this together when I think about the EBIDTA that we are achieving, thinking about the net income, it puts the company on a different stage, a different level. We have been telling the story of our company for about seven or eight years. We started as a cash only company creating operations from scratch and to do what we do to areas, that's going to be tough for the first few years, but then the results they're going to start showing up, so bear with us. And now we're 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 we can see that on the next page, on Page 10, 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, it was zero. And now we've been able to start building up net growth, which is pretty good again. Again, it shows how the company is evolving. And all the other things that is worth mentioning here is that we reduced debt. You can see that it went down significantly from June 30th to December 31st. So we've reduced that 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 closing 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 this time of uncertainty. So, guys that's what we had to mention.

We can move now to Q&A. Thank you.

Question-and-Answer Session

Thank you. The call is now open for questions. [Operator Instructions] Please hold while we poll for questions. [Operator Instructions]

I will turn over to Mr. Julio Piza for final considerations. Mr. Piza, you may give your final considerations now.

Julio Piza

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 you can say about the volatility in the markets and everything else, but as managers of this company we are quite pleased because we have been preparing ourselves for this, from the last few years. So now the company is at a fantastic position to take advantage of what's happened. We have a very strong balance sheet, our solid cash position we've been able to adopt ourselves and rejuvenate ourselves operationally over the 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 certainly. That's what we had for this semester and hope to see you again in the next quarter. Thank you.

Operator

Thank you. This concludes today's BrasilAgro's second quarter 2016 results conference call. You may disconnect your lines at this time.

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