BrasilAgro - Companhia Brasileira de Propriedades Agricolas (LND) 2014 Q4 法說會逐字稿

Good morning. Welcome, everyone, to BrasilAgro's fourth 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. (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 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.

Thank you. Welcome, everyone, to our fourth quarter 2014 conference call. If you may, we can move to page two with the highlights for the year.

First of all, that's the acquisition of 141,000 hectares in Paraguay, which we are very proud of. It's our international expansion plan going on.

Also, as we've mentioned before, the Company a couple years ago entered a more stable phase in which we are selling land on a recurring basis. So, we sold two operations, one in Paraguay, one in Brazil, which was very interesting. It reinforces our investment thesis. Of course, we would want more and positively sure more will come in the short term, but we are doing it.

Also, we've accomplished or attained another 16,000 hectares of environmental permits. We're expecting -- or we're finalizing another 13,000 hectares of developed area. With that, we are reaching 100,000 hectares of developed land in the last six years.

And also, as part of our requests we've been getting from investors, we have hired an independent appraisal company that did evaluate our portfolio, reaching BRL1.3 billion in value for our farms. And you're going to see more of that, more details.

For an operational perspective, it was a mixed feeling year. I think the real estate development growth is spectacular. The sale part is good, not bad. It's good. It could be better, a little bit better, but it's good.

From the agricultural operation, mixed feelings. A pretty good year on POE, a pretty good year with sugar cane, a pretty good year in Paraguay, going to see the details, horrible year in Bahia. And it's part of what we do on just developing operating and the margins. We are always more [sensible] to weather patterns.

So, before we go into the details a little bit about the overall scenario, we have on page three soybean prices going down significantly in the last few months, reaching levels that we had seen in the end of 2011, which of course puts tremendous pressure in margins for next year if we don't have any change in soybean prices.

If you don't have any changes in exchange rate, margins are going to be extremely tight for next year in some regions of Brazil. Especially the ones that are very far away from the port will suffer and will have negative results. Of course, given the fact that we have had a few years of solid margins, farmers in general are in good shape. Therefore, they will continue to produce.

But, what we do know is that, given current margins, there will be no expansion in area in Brazil, a very marginal one. And over time, actually there might be a reduction in area, if margins are not to improve.

And then, the question remains if overall demand and supply in the world has adjusted or not. But, definitely it's a year to be very, very careful.

On page four, we haven't seen any impact on the prices because of that. But, we do expect some adjustments, especially in regions that actually appreciated the most in the last few years, suffering extremely high margins especially from corn, for instance, but also beans.

And so, there might be and probably there will be some adjustments. But, as we said before, I think it's never right to perpetuate short term tendencies, neither for the good or for the bad. So, some regions of Brazil will suffer a lot. Some of them will not suffer, or suffer marginally, but to be seen. It's a thing that opens up interesting opportunities for a company such as ours.

On page five, going through what we did this year starting with Paraguay, which happened in December 2013. We acquired a 50% stake in a company called Cresca, which was a joint venture between Carlos Casado and Cresud. And also, Cresud had all the management of Cresca and also a management fee because of that.

At that point, Cresca had roughly 45,000 hectares and an option to increase that size in another 96,000 hectares, reaching a total of 141,000. What we did back then is we bought from Cresud its stake, taking over just management of Cresca, and also the option to increase total area.

With that, we had a total of $18.5 million paid out to Cresud, and another $17 million that -- part of it is already paid, part of it is to be paid to Cresca in order to exercise its option and achieve the full size of it. So, that is the operation.

Since it was a related party transaction, we took all the careful steps required by Brazilian legislation in the way we see this. So, the whole transaction was covered by independent appraisal and also was only presented, discussed, and approved by the independent Board members. So, all the Board members appointed by Cresud were not involved in that discussion, and it was approved unanimously.

And also, after performing the transaction, we had a BrasilAgro Day which over 40 people attended. And we're very transparent and are discussing all the details about the transaction.

So, this is the transaction. The farms are located in a very interesting region, in a very new region in Paraguay called Departamento Boqueron, which is some 500 kilometers northwest of Asuncion. It's a region to be developed with incredibly high fertility and nothing much going on there.

So, it's typically the regions we like to go. They have a tremendous potential value to be unlocked, and you're going to see some of the results.

Also, on page six on the real estate, the farm sales, we had two this year; a little bit of Paraguay, 24,000 hectares that we sold which was undeveloped. There are a few reasons why we sold an undeveloped farm.

The first one, because we are bringing in an important producer to the region, therefore helping us to develop the whole thing. So, it's important to speed up things. And definitely by having new neighbors such as this one will help us driving the whole region up.

Also, that generates an important cash flow in Paraguay. We have a very ambitious development plan for Paraguay that requires a significant amount of cash. And by actually generating cash there, it actually supports the plan quite nicely.

And also a third element is that, by selling 24,000 hectares at the price we sold, it actually confirms that the transaction that we did back in December with Cresud was very, very accretive for BrasilAgro shareholders, lifting any remaining doubts about it. So, we're very pleased to be able to achieve a series of important goals with this transaction.

And also, we sold 1,000 plus hectares of Araucaria, 900 arable; incredible price. We've very pleased. The whole internal rate of return on the project over 19%, so extremely pleased. It's part of our business model to keep on selling pieces and parts of the farms, and we keep on doing so at very attractive prices and multiples.

On page seven, a little bit of portfolio evolution. We have farm by farm the level of development, what is under development, what is already developed. You can see some of the farms such as the ones with sugarcane. We consider them to be fully developed. Other ones are on the way, such as Cremaq, almost there.

But, most of them are actually still going on. So, still a lot of room for value creation or a lot of room for productivity increase. So, on an aggregated basis, we classify 22% of our hectares to be developed, 27% under development, so growing something, and the rest of it, which is over 50%, still untouched.

And also, evolution wise we've kept on developing and increasing the amount of hectares every year. And this is perhaps the most important source of value for shareholders.

And we are reaching a very important mark this year. We're going to reach over 100,000 hectares developed, which is an important -- a very important mark for us. We're very pleased to achieve that level of hectares developed.

On page eight, the independent appraisal done by Deloitte on our farms, an important thing. And they've reached BRL1.3 billion in terms of farmland value. That's just the value with the farms that we have.

Important couple disclaimers here. When we hired them to do the job, we had sold Cresca already. Therefore, it is only -- the 24,000 hectares is out of here.

But, from an accounting perspective, we haven't booked that sale yet because we already handed possession of this part, so it's in July. And according to our accounting standards, we only account for a transaction when we have actually handed possession of it, of the farm to the buyer.

So, for the Deloitte appraisal, Cresca or the farm in Paraguay is sold. From an accounting perspective, it isn't. So, that's one. And the second one, when they finalized the job, we had not sold Araucaria yet. Moreover, when they made the report, we sold 1,000 plus hectares.

Therefore, in that number they put here for Araucaria, it does not take into consideration the sale that we did. So, that's the difference. Small differences, but it's important for us to actually make that disclaimer. So, that is the independent one.

But, on the next page, on page nine, we keep on our job of every year providing an internal assessment of our farms that we do. And so, this year we did it again. And in order to make it comparable to Deloitte, we did it on the same basis, therefore considering the sale of Cresca, of the farm in Paraguay, but not considering the sale of Araucaria.

And we reached a lower number than Deloitte. And I think it's fine for different people to find different value on things. But, that's our own internal assessment. And on that, we can actually compare the evolution from last year and the year before so there's a nice and recurrent same basis evaluation.

As I said, to make it comparable to Deloitte, we didn't include the sale of Araucaria. And as a reference, we are putting here that Araucaria on June 30th is worth, in our view, BRL172 million. If we were to consider the sale, that number would have dropped to BRL138.5 million. So, that is a reference for you guys to keep on track of our own internal valuation.

On page 10, agricultural operational performance. On the left side, we have a rainfall map or evolution for Bahia. And you can see that January and February were really short of rainfall, and especially February, because not only it was a very low amount but the distribution was awful.

So, we went on farms on ours that had 30, 35 days without a single drop of rain. That, of course, affected productivity significantly, and especially in our case. We have an important amount of hectares that are very, very young and not developed, so very, very sensitive to those kinds of weather changes.

And that impacting, of course, productivity. What we did, as we did last year and the year before, we broke down hectares into new, which is the first or second year under development, and more developed. And using that breakdown, we go from 1.1 to 2.6 tons of soybean per hectare, which is very in line with our development process.

So, we have -- of course we've had areas fully developed in POE with over 3.5 tons of soybean. And also, we have first year areas in Bahia that were severely affected, yielding less than a ton of soybeans.

Also important to notice here that the second crop of corn was 3.7 tons, which is very good for us given the fact we are doing mostly the second crop corn in POE, which actually a few years ago nobody thought was possible to produce soybean there. And now we are doing not only soybean but also a second crop of corn. And given the region, the corn price is very attractive, therefore making it a very interesting economic decision.

Also on page 10, we are mentioning here Paraguay, which is at 2.3 tons per hectare, which is amazing actually, because if you think -- if you believe or if you take into consideration that the cost to produce in Paraguay, the direct cost of soybean is half as much as in Brazil.

The kind of margins which is in Paraguay on this kind of yield are extremely high, higher than the vast majority of the soybean operations in Brazil, not only ours but in Brazil overall. So, we are extremely pleased with that, of course bearing in mind that this year was pretty good in terms of rainfall in Paraguay and next year might not be. But, the fact that we actually can achieve those kinds of yields with that kind of direct cost is actually a pretty good way to evaluate our transactions and incredibly positive for us.

On page 11, a little bit of explanation on sugarcane. The sugarcane, we have the calendar year production and the accounting year. The sugarcane harvest begins in March/April and goes all the way to November, and our fiscal year ends on June 30th.

So, depending on how the harvest started and the speed of the harvest, a different number of hectares is accounted for in each year. So, to give you an example, we have on the table on top the calendar year, the amount of -- the harvested tons, hectares, and actually yield in terms of tons per hectare.

And you can see what happened in 2012, 2013, and 2014. In 2014, this is only until June 30th. The harvest keeps on going and is going to go until November. And there is a drop in productivity from 2012 and 2013, and that's basically because the sugarcane reed is getting older.

But, it's already been reverted in 2014 as you have new hectares coming in or being renovated. Of course, we don't expect our average yield to go all the way up to 107. It's going to get closer to 90, which is a very decent one.

Then, when you go to the fiscal version of it, and in that, depending on how the harvest behaved, there is a different number of hectares that were accounted for in each year. So, to give an example, in 2012 we harvested 7,000 hectares. The 17,000 pounds is a wrong number. The right number is 5-5-1, 551,000 tons.

And then what happened, in 2012 we -- then go to 2013. In 2013, what happened is that we started -- most of the last year was done after June and July, and we did a lot before June 30th. Therefore, in the fiscal year ending 2013, we harvested almost 11,000 hectares of sugarcane, meaning that several hectares on those farms were harvested twice during that fiscal year.

And that's why production went up so much. So, that's important to notice, that the drop in production on a fiscal basis, the vast majority is explained by actually when those hectares were accounted for.

Page 12, we still have a little bit of soybean left from this year, 4%. That is being sold as we speak. For next year, we have 5% already sold in terms of price, not much, and roughly 50% already negotiated.

What's been happening is that, as soybean prices go down, the premiums at the port are going up significantly. So, we're taking advantage of that situation to start actually locking in the premiums at the port, leaving the, of course, prices to be negotiated later.

On page 14, EBITDA and adjusted EBITDA. It's important to remember always what we try to do with adjusted EBITDA is to get a better picture on the operational results of the company. Therefore, we take out of the equation all of the, for instance, long term biological assets' implications, leaving only the short term ones so we can have -- this is a good proxy for what went on from an operational perspective and cash perspective of the Company this year.

Our adjusted EBITDA for 2014 is BRL4.4 million, remembering that the sale of Cresca is not impacting here. And the operational results of Paraguay are not impacting in this calculation as well, which are positive.

And with the small sale, we are up. We're positive. It's the third consecutive year -- the fourth consecutive year the Company is delivering a positive EBITDA, which in our belief is the best metric to evaluate us, giving the important amount of depreciation that comes in our books because of our business model of developing land.

On the income statement exactly that's what you can see. The net income is minus BRL6 million, which is severely impacted by depreciation. That's the most relevant.

The most different -- largest difference between last year and this year is farm sales, which explained most of it. We had more last year.

On the next page, balance sheet, important to notice a couple things here. First of all, Paraguay or Cresca, it's part of the investment. Most of those investments, or no current assets, are Paraguay. And also, transactions between related parties also accounted for some of Paraguay.

The way we structured the transaction, part of what we paid for Paraguay is equity and part of it is debt. And that's why the transaction with the related parties. And that part also accrues interest every quarter, so it keeps going up and up.

Also, on the balance sheet we have acquisitions payable, which is all the farms that we bought and haven't fully paid yet. And transactions of related parties is all the money that we have to actually put into Paraguay to Cresca to actually exercise the options or pay for the options that we exercised already.

And also, just to mention other reserves, in the shareholders' equity is the different between what we paid in Paraguay -- paid for Paraguay back in December and the fair value of it. So, that goes into our other reserves.

So, those were the main aspects we wanted to cover in our call. So, we can move to Q and A now. Thank you.

We will now being the question and answer session. (Operator instructions.) Paulo Valaci, Brasil Plural.

Good afternoon, everybody. I have two questions, if I may. The first one is about the Company's partnership in Bahia. I'm talking about the one that was eliminated in June of this year. I was wondering how this decision impacts BrasilAgro's call option to purchase the Parceria I Farm, and if there is a remote possibility of re-implementing this farm into the portfolio in the future, and also if this actually changes anything regarding the Parceria II Farm. That's the first question.

And then, my second question is about CapEx for 2015. And it's basically just if you guys have a guidance that we could work with in our estimates for the year. Those are the two questions. Thank you.

For the first question -- thanks for the questions, Paulo -- we cancelled the Parceria we had in Bahia. It hasn't performed to what we expected, so we cancelled the Parceria. We cancelled the option to buy the farm. It was out of the money. We didn't have any interest in pursuing that.

It doesn't change anything regarding the Parceria II, which is the one in POE, which has performed quite well, according to the plan. So, we're excited with that one.

We were not with the one in the south in Bahia. That's the reason we cancelled it. We already have a great exposure to Bahia. It didn't make any sense to continue that operation. That's the reason we cancelled.

As for the CapEx for the year, we don't have any specific guidance. What we can assume, that is in general, we expect to spend on a single hectare of development between BRL2,000 and BRL2,500 per hectare. So, you can make the calculations based on that number.

All right. Thank you.

This concludes the question and answer session. I'll turn over to Mr. Julio Piza for his final considerations. Mr. Piza, you may give you final considerations now.

Thank you. Thank you, everyone. As I said before, I think it's a year to celebrate a few things, such as expansions, such as our high level of development. It's also to be happy about keep on selling farms, as we did, as it's the third consecutive year that we are doing so in important numbers. I'm just saying that should be more. It will be more.

From an operational perspective, we are not pleased with Bahia. It was a tough year, but we are pleased that portfolio is holding together and that the Company, even though developing a lot of land, doing all the hard work and being very sensitive to weather issues, we continue to deliver positive EBITDA.

So, we are pleased with that, and looking forward to another year of lots of development and perhaps new acquisitions.

With that, thank you, everyone, for joining. I'll see you all in the next quarter.

Thank you. This concludes today's BrasilAgro's fourth quarter 2014 results conference call. You may disconnect your lines at this time.