BrasilAgro - Companhia Brasileira de Propriedades Agricolas (LND) 2013 Q4 法說會逐字稿

Good afternoon. Welcome everyone to BrasilAgro's Fourth Quarter 2013 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 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 macro economic 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 and Investor Relations Officer. Sir, you may begin your conference.

Thank you. Welcome, everybody, to our annual call. And we can start by going over the highlights on page two.

So net revenues are over R$380 million, 80% up from last year. Also, adjusted EBITDA of almost R$24 million this year, which is 158% improvement over last year.

And net income, which we are very proud of, of almost R$29 million this year and driven basically by our operations and [rank] producing in sugar cane. And also by the sale of almost 20,000 hectares of a part of our Araucaria farm, and the part of Cremaq and the Horizontina farm.

The whole lot we sold for basically R$123 million present value. And we had an internal rate of return of approximately 24% on those specific projects. Also we have obtained a whole new lot of environmental licenses to continue improving our operating area.

And also we migrate our ADR program from level I to level II. And for now we are now properly registered with SEC. And also we were able to lease our ADRs level II under the ticker LND, for land, on the New York Exchange; also a very important step for us.

So those were the highlights. And, as we always do before we go into the details of the Company, a little bit of the overall scenario for the sector.

On page three we have the soy bean price evolution. And the sort of lighter line is the price in reals per bag -- yes, reals per bag. And the dark line is the price of dollars per bushel.

Two comments I have here. First of all, incredible volatility we've been experiencing in the last few months, mainly due to agro-related issues. But again, [land] has always been a part of what we do. The real issue, perhaps, behind of that is a very tight (inaudible) ratio everywhere. Therefore, small changes in volume can have a significant impact on prices.

And second, as we expand total area and production in the world, we tend to get to areas that are more volatile. Therefore, one could argue that we do have a right-size structure used for small volatility magnifies impact on prices. But also, that by expanding to new frontiers, we are increasing overall volatility in the system. So, business observation number one.

Observation number two is that since the last four or five -- four months, basically, five months, we've been experiencing a (inaudible) between the prices in Brasil and the US, mainly due to depreciated exchange rate in Brasil, which can be extremely beneficial for margins -- in reals, of course.

So those are the two comments. And then, of course, we will have a new impact in prices as we move forward. On page four, we do have an [FNP] on prices for different regions in Brasil. And it has the price since 2006. And also the last 12 months appreciation.

As you can see there, it continues to be a very strong trend. Prices continue to go up. But most interesting for me is that actually prices are moving at different paces in different regions. So you can see, for instance, the central west, especially in Mato Grosso, has experienced a fantastic increase in price in the last couple of years. And perhaps it's worth examining what is behind this price increase.

On page five we're talking about earnings before interest and taxes for farmers. We have here FNP and IBEG, which is Brasil geographic. So this is what happened in Central Mato Grosso in the region called Sorriso. This is what happen to a farm producing soy bean and corn.

Since '09 until last year, margins for soy bean have gone up significantly. Not only that, but more importantly, corn second crop margins went up as well significantly. On a percentage basis, even more so which actually drove up total EBIT per year per hectare from a very small amount in '09/'10 to R$448 in '10/'11 to almost R$1,500 last year.

And in order to do that, we are estimating that (inaudible) farm would go up roughly 50% (inaudible) with a second corn crop. So perhaps this is a good indicator of why land prices in those regions went up.

But, interestingly enough, when we look for next year, what happened is that actually soy bean margins are going down significantly. And given current prices and current exchange rates for next year, corn on the second corn crops from Mata Grosso specifically for this region are actually negative.

Therefore, there is a very low incentive for the farmers to start producing corn on the second crop. Therefore, it will be interesting to see what's going to happen to land prices, not only overall land prices but the relationship within the regions of Brasil.

We do believe that this new corn level prices and soy bean level prices will, perhaps, could change land prices in Brasil, but more importantly, could affect the relative value among the regions. So it'll be interesting to see what's going to happen as we have these kinds of margins for the sector.

So going back to the Company in specific, our projects in development and how we are doing it. So here we have by farm how we see them being developed. So the percentage of the farms that are going through some level of development, the percentage of the farms that has actually been developed already.

So, just an example, for instance, if you take out the Taquari farm, it's 100% developed already. And, therefore, from what we had in mind when we first bought the farm, we have developed (inaudible). So, that's one case.

On the other side of the spectrum, we have a farm such as Nova Buriti, which since we haven't been able to actually get the permits to operate the farm, it hasn't gone through any kind of development yet.

And we have all the other farms in between, such as Cremaq where probably 60% of the farm is already developed, 30% is going through the phases of development before (inaudible) improving, and so on. And a small portion of the farms yet to be developed.

Or you take Chaparral farm, which probably has 40% of it that is going through some level of development at different stages. But it's still going through development. And 60% of the farm is still to be developed.

So this is how we see our portfolio. When I look at it, I think is a very important message as you can actually draw from this. First of all, we do have an important amount of land to be developed. We do have an important (inaudible) land bank. We do have an important amount of land that is already going through some development that will, in the short term, imply a significant higher yield for the Company as pieces of those farms get more developed.

And also, we already have some pieces, some parts of the farms that we could be looking into selling. So it is a portfolio that is much more balanced than it was in the past -- certainly a good thing for us.

Also in terms of land development evolution, it is always depends on the amount of hectares we have. And you all know how hard it is to get the proper licenses and everything in Brasil.

So last year, we did almost 12,000 hectares. And I guess I think it would be possible to plan on something along the same lines for the upcoming years to keep on developing between 12,000 and 15,000 hectares every year is something that is attainable to us.

On page seven, I wish to comment a little bit on how the farm sales ran this year. I have three examples, which is pretty good (inaudible).

So we have, first of all, Horizontina farm. We sold the farm as a whole for R$75 million, all paid in cash. A very important project because it was very fast. And at this time was bought after the commodity peaked -- the commodity prices peaked in 2008. So, actually, it was at the point that it continued to deliver superior returns, even after everyone else seemed to have found the commodity cycles.

So important because we sold the farm as a whole solely for cash; and because it was a project that got started after the peak of 2008, so delivering internal rate of turnover of 27%.

Then we sold a piece of Araucaria farm -- a very important project. Sugar cane conversion. Extremely high price, high value. We're talking here about an excess of R$35,000 to a hectare, delivering an internal rate of return of over 20%. And, actually, it's important to note that the price of R$3.3 million (inaudible) represents the net present value of the sale at the moment we did it.

Actually, when we look at our balance sheet, you will see that actually the sale price has gone up since then. So it actually -- the internal rate of return can -- it is actually higher than that, which (inaudible) actually what happened to our (inaudible) receivables.

And then also we sold a piece of Fazenda Cremaq (inaudible) POI, a very iconic project of ours, a fantastic farm. I'd say that it is the typical project that you would expect from us -- six to seven year cycle from zero to 100, taking a farm that had nothing and started selling pieces that are fully developed now.

So this is the typical project of BrasilAgro with an internal rate of return of over 24%. And also, again, using net present value and the values of soy beans back then when we first actually closed the deal.

On page eight, a little bit of our operations performance. Mixed (inaudible) here. Had a very tough year in Bahia, a very tough year in Piaui. Therefore, our yields were not as good as we were expecting.

But important to say, our most developed pieces of the farms actually helped pretty good. When we look into just the piece of the farms that actually were or are more developed, we had yields of 2.7 times per hectare, which is pretty decent for the region for what happened this year.

So even though it was very hard on us, the kind of productivity we had on the newer (inaudible) of the farms, it looks like we are on the right track in terms of how we are developing the farms and how the (inaudible) is holding up.

So even though Bahia suffered a lot, Piaui suffered a little bit less. And then we had the sugar cane to compensate for that. So, overall, of course, we are now (inaudible), we have to have a much higher yield (inaudible) as possible. Again, it is part of what we do. The weather (inaudible) is very hard to project and very hard to manage. But, again, the portfolio is holding up quite nicely.

On page nine is continuance of operations performance. Sugar cane -- a fantastic year. Over 1 million tons supplied to ETH.

Our yield of 92 tons per hectare, which is actually fantastic. Actually is above the average -- above Sao Paolo average. So pretty happy with that even though because this is actually in the middle of the cycle so there is not a sugar cane really that is [biased] now that (inaudible) recently in demand (inaudible). So it's an average. But for this kind of year, it's pretty good. Even so because this is a new region for sugar cane, so we can expect -- actually, we're pretty happy with that.

On pasture, also the Preferencia farm, developing faster and faster last year. We tried a little bit of soy beans. Results were actually pretty interesting, harvesting around 2,000 kilos per hectare on that specific farm is pretty good. So we should increase the amount of soybeans you see there, and continue to develop more scrub into pasture.

A little bit on the hedging for next year that we are already structuring. We had roughly 62% of our -- between 62% and 66%, depending if we're looking at the soy bean or dollar of our position next near already hedged. This number is a very initial estimate of how many tons we're going to be producing. So that number, most likely, will change in the next few months as we finalize our operational budget for the year. So this is just the first draft of it. And we are roughly at $12.70, $12.80 per bushel, and $2.45 on the exchange rate.

On page 11, a little bit of our Adjusted EBITDA. Again, always good to remember that we like to take our EBITDA and adjust it for one, everything that is biological asset that we don't have a counterpart in the operational side of it.

So, for instance, all the sugar cane -- inventory of sugar cane for the future -- we take it out from our adjusted EBITDA because we don't believe it is a good proxy of what we did in the year.

Also, we add back the result of the financial derivatives -- the derivatives that are in the financial part. And we bring back all the derivatives that have counterpart in the productive side. So those are the main adjustments we do in our EBITDA. We reached this year R$23.7 million EBITDA, up 160% from last year.

Again, the (inaudible) and [RNTRE] had a profound impact on it. We were expecting a higher number than that. But, again, it's part of what we do by being in the business of developing land, we generate fantastic returns on the line. But our productivity is always much more volatile. So it's part of what we do to have use that -- we don't perform in terms of (inaudible) as well as we would expect.

But, again, it's pretty important that the Company is generating positive cash flows, therefore maintaining (inaudible) business.

On the next page, a little bit on the income statement -- again, R$310 million in terms of sales. Then we have cost of products sold and also cost of farms sold. (Inaudible) expenses went up significantly. And, of course, because we have sold much more farms with brokers' fees a part of it.

In terms of SG&A, we are pretty much flat from last year. Continue to be very focused on controlling costs. And the result of that is R$28.7 million net income. Which, for us again, is a fantastic result when we think about what we did with the Company in the last seven years by starting from scratch and by investing in what we do, we generate an important amount of depreciation every year. To be able to generate such a positive net income is a source of great joy for us.

We do believe the Company after investing so much money and going through very (inaudible) times in terms of developing its activities from zero, developing the farms, producing, I think are fantastic results for us so we are already at this level.

And then the result of that is our balance sheet where we can see, basically, again, always remember that are farms are treated as property for investment this year at R$339 million. Lower than last year because we sold farms. And that actually means more receivables and more cash.

But most importantly, when we look at that is that actually is stockholders' equity. It's actually above our original book value. Therefore, it means the Company is starting to pay back our shareholders, given our track record.

When I look into all the other companies that went public in Brasil on a pre-operational status, I guess we are doing a good job. So we're pretty happy with that.

(Inaudible) a good thing that we did (inaudible) as well, we listed our ADRs in New York, which means not only internationally it also can have easier access to our shares. But also it means we are now registered with SEC. So we are SOX compliant, increasing the level of control of the Company.

So it is a great achievement. Only 33 Brazilian companies have done that so far. And we are the first to do it in the last three years. And we acre the first one of the agricultural production companies to do so. It's also a source of great pride to us.

And on page 15, important to notice that the Board of Directors in our meeting this week that approved the financials, also proposed a dividend payment of R$5.9 million, or roughly $0.10 of real per share. This represents 75% of our capital reserve, which exceeds the minimum level of 25%.

So, also very important to us that we are starting to pay back our shareholders. Again, the number represents roughly 1%, given our current share price -- a little more than that. But it means that the Company is on the right track.

So, I guess the message here is we are already -- the Company has closed its first chapter. It's already a reality in terms of operational results.

Having said that, it is important to notice that this amount will be submitted at our shareholders' meeting next October 29 for approval. So it is pending approval from our shareholders. Therefore, the payment itself will happen after it's been approved at the shareholders meeting the end of next month.

So that's what we had to say about this year. And we can move up to Q&A now.

Thank you. The floor is now open for questions. (Operator Instructions). Please hold while we poll for questions. (Operator Instructions). Our first question is from Ravi Jain, HSBC. Please go ahead

Hi. Good afternoon. Congrats on the results. My question was regarding your strategy for buying additional land. And would you consider outside Brasil, or would you look at Brasil at this point? Thank you.

Ravi, thanks for asking. A very good question. I don't know if you are all familiar with that, but last Friday the Sao Paolo Court of Justice ruled that actually any Brazilian company, regardless of its capital, are allowed to buy farm land in the state of Sao Paolo.

So the whole regulatory aspect in Brasil moving back and forth. It looks like it's OK in Sao Paolo now. So perhaps it's a possibility for us as well.

Having said that, I do believe Brasil has great opportunities for buying land. I have no doubts about it, especially if you think outside the box, if you don't go for the specific regions and the most valuable ones. So I do believe there's an opportunity. But, of course, we like to think that the Company has the capabilities to operate abroad. And our business model can be extremely successful abroad.

So I wouldn't say we wouldn't go abroad. I think it's a possibility. And the Company is always looking to new possibilities. I don't say it's going to happen in the short term. I wouldn't say it's not going to happen in the short term. It's something that we do consider.

Thank you so much. Very clear.

(Operator instructions). Having no further questions, I'll turn the call back to Mr. Julio Toledo Piza for final considerations. Mr. Piza, you may give you final considerations now.

Thanks, everyone, for joining us. It's been a (inaudible) for us. We're pretty proud of the results. And we are pretty confident that 2014 is going to be at least as good as this one in terms of developing the Company and reaching the next level in terms of performance. So thank you very much. And see you next quarter.

Thank you. This concludes today's BrasilAgro's fourth quarter 2013 results conference call. You may disconnect your lines at this time.