BrasilAgro - Companhia Brasileira de Propriedades Agricolas (LND) 2015 Q1 法說會逐字稿

Good morning. Welcome, everyone, to BrasilAgro's first-quarter 2015 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 not -- 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 first-quarter results conference call.

You can move to the presentation on page 2, we have all the highlights. Net revenues of almost BRL51 million, net income BRL1.6 million, adjusted EBITDA BRL5.5 million, estimated development area for this year will be around 10,000 hectares and planted area of roughly 82,000 hectares. Those are the highlights. I am going to go into the details later in the presentation.

But moving on page 3, a little bit of scenario. Since our last call three months ago, the commodities market has changed significantly. You can see that soybean prices in Chicago have come down significantly and have rebounded a little in the past few weeks. But yet we are expected to -- we expect to see lower prices next year than we have seen in the last few months. And part of it has been already compensated by a depreciated currency, so the price in reais has changed to a large expense than in dollars, but yet we do foresee an interesting year, especially for farmers with liabilities in dollars.

But nevertheless some price recovery already, which is a good thing, but we do expect a tough year. And this we reflect on our operational decisions or what we are planning for the year that we start right now.

On page 4, this is land prices in Brazil, haven't had any reaction to the change in prices. As I said before and I continue to believe, I believe some regions in Brazil will suffer more, some regions of Brazil will suffer less from this adjustment in prices because they have actually behaved differently in the last two years. So we do expect some adjustment here especially in some regions of Brazil, but it hasn't happened yet. Say that liquidity in the market is a little dry right now, so there is not so many deals going on. But I do expect some adjustments especially in (inaudible) regions that haven't actually experienced a significant depreciation.

On next page, page 5, you can see our planted area evolution and here I go back to the soybean prices. We have decided to be very secure this year and we elected two areas first year, a couple of second year areas that we know that have lower productivity, that have higher volatility and we have decided not to plant those. We can, of course, plant grass, any type of coverage. So you can actually keep on developing the soil, keep on improving organic matter, keeping preparing the soil for next year but we have decided not to plant this year given that low prices would surely deliver negative margins and we don't find it's a sounding decision to actually go ahead and do it.

But also it's important to say that our development process continue to go on, that is the part on the right side of the chart. So we expect to reach 110,000 hectares, so another 10,000 hectares to be developed. We already initiated that development which is going to happen. The extent of it will depend on how things go throughout the year as we see this rebound in prices being confirmed and expect the next years to adjust positively. We're going to finish the CapEx on those 10,000 hectares.

But if situation worsens, we're going to stop the CapEx so we can actually be better prepared. So we have an adjustment in planted area for next year, so we have reduced it a few areas, increased in another, so we have a better mix of areas which should help us increase profitability up. But the development will continue to happen, the level of it we can adjust it as the year goes.

On page 6, the level of development of each property of ours, and this is our best understanding, it doesn't have to be perfect, it is not perfect. But roughly we're talking about half of it is still to be developed, 17% developed and 33% underdevelopment and it is broken down by farm. I would like to point out that Nova Buriti hasn't been developed yet, we're still waiting for permit and we have Alto Taquari farm which is fully developed already and the other farms somewhere in between.

But looking this, we just see a great land bank for us to develop and also a third of the portfolio that also will improve as the year goes by.

On page 7, our outlook for next year in terms of hedge position, on the left side I have soybean physical sales and we have roughly 70% of our soybeans committed. And that means we have secured and negotiated logistics, we have negotiated port premiums. We took advantage when soybean prices went down significantly, around $950 per bushel when the exchange rate was not that favorable to start negotiating physical volumes. We could secure interest in premiums at a port and we did so and interesting logistics with very descent prices.

And we have -- also we did the physical port. And on the other hand as for the price, we have only 20% of it sold at $10.6, that is our average, and even all around the US on the dollar hedge, only 6.6% has been sold already. So, that's the way the market is behaving. That put us in a great shape because we can profit from any rebound in price; we can profit, as we already are, from the depreciating real; and we have secured the premiums, which are the ones that could suffer the most if prices adjust.

On page 8, our adjusted EBITDA. We have on the top part of the page EBITDA as calculated from our financial -- our net -- from our financial results, and the lower bottom part of the page we have our adjusted version of it.

Always remember, we try to do an adjustment that reflects the provisional results of the Company. So we take out any financial expense already -- that is not related to operations. So we try to adjust for that. Also, we adjust biological assets to reflect whatever is actually sold or ready to be sold and remove any future projections.

And also, we adjust it for our participation in Paraguay. Since it's only a 50% stake, it doesn't consolidate into our financials. So we calculated EBITDA from the Paraguay operation and we added back here which puts us at BRL5.5 million EBITDA for the first quarter.

It's a fantastic result for us. The Company keeps in shape -- continues in shape in terms of generating cash, which is very important to us, and a significant improvement from last year. So that is our adjusted EBITDA conversion on page 8.

On page 9, our income statement; positive, which is very important to us. And it's positive despite us having to adjust some of the receivables from farms that we have outstanding, which is very important for us to continue to deliver positive net income, which will make it possible for the Company to do its share buyback program to pay all dividends. That's something that we are pursuing.

And it is important to notice that the sale of Paraguay, even though we accounted for it in the EBITDA, it doesn't -- it's not fully captured here in the income statement. Actually, given accounting rules and the change in the currency of Paraguay and all of that actually, on an income statement perspective Paraguay has delivered a negative result to us; equity pick up of minus BRL800,000. So I think it's a very solid income statement.

And on page 10, finally our balance sheet. It's always important to notice that we keep all the farms, all the properties as investment properties and we keep them at cost -- plus all of the depreciated investments.

And it's interesting -- the only interesting thing that I would like to add here is that we have been discussing this past week in terms of our total equity and our net worth. And it's interesting because we have -- in the last five or six years, we have already depreciated over BRL50 million of investments in our farms; that's just basically investments on the land, which of course made those farms more valuable, but of course diminishes or decreases our accumulated profit.

So that is the impact of depreciating as much as we are. So we are being very efficient from a tax perspective, but of course the impact of that is having accumulated losses.

So that's what we have to say. So we can move to Q&A.

Thank you. The floor is now open for questions. (Operator Instructions)

Paulo Valaci, Brasil Plural.

I have two questions if I may. First one is on land prices.

This is the operator. I will find that line. One moment.

Can I be heard?

Yes, just one moment while we reconnect Mr. Piza's location. Just one moment. Just stay connected. Thank you.

Okay, sure.

Mr. Piza's location has been rejoined to the call. Please proceed.

Okay, sorry. A small connection problem here. Could you please repeat the question?

Yes, yes, sure. So I have two questions (technical difficulty) on land prices in Brazil in 2013. You have already begun to see, as you summed in the presentation, a recovery in commodity prices represented by soybean in the presentation, as well as some BRL depreciation. So I like to know if there is still some opportunity for land price reduction next year or if that scenario is slowly changing in your view, Julio?

And then if I may, the second question is about BrasilAgro's land sales specifically. The release is very clear about which stage of development each of the Company's farms is in. And I was wondering if there is a defined hurdle for when each farm will be ready for a divestment. If the entire farm will be divested only or if you can divest portions of the farm as those portions become mature individually? Those are the two questions. Thank you.

So, Paulo, so I will start with the second one and then we can move to the first one. As I told you, the perception of how the farms are developed is something that we look into it and say, you know what, we believe that's done or do we believe there's something else to be done. So that is our best understanding. So we have 17% in our best understanding of the farms already -- of the hectares already being -- that could be sold in theory.

And that says to us, you know what, those farms should be in the market. And we are negotiating some of them; some of them we are not. It is a combination between the way we see how developed they are, how the market is in the region and how the market is in general.

Of course even though if a farm is fully developed in our perspective though the market is pretty bad, we shouldn't be selling that farm. Or, as it had happened before, sometimes the farm is not yet fully developed but has great interest in it, we might be able to do a great sale as we did in the past. For instance, we have been -- the last couple of years we have been selling pieces of [Moga Vermila Ronkaya], which is a farm that is fully developed. So every year we sell 500 hectares, a 1,000 hectares. So we cut it in pieces and start selling.

So, yes, it is -- we have done whole farms, we have done pieces of them and I see us doing more. It's just a matter of time. If I look back in the last 24 months, we have done over BRL200 million of sales. So I expect the Company to continue to do so.

Sure. Thank you.

As for your -- go ahead.

On the first question, you want me to repeat it?

I think the market is being pretty volatile -- went down. If you look into prices for next year, it was as high as $12.80 per bushel. It went down all the way to $9.40. Now it has rebounded to $10.40. The exchange rate has changed significantly. It was 2.40 plus. Now, it's -- the forward is 2.70 plus for July next year. So it's being incredibly volatile.

So nobody knows for sure what the price is going to be. But it has rebounded a little. But I do believe the composition of lower soybean prices and higher exchange rate, even though delivers the same revenue or could live into a similar revenue, will increase your costs, therefore pressuring margins.

So that's the reason why I do expect to see some land prices adjustment, especially in regions that have benefited the most in the last few years from high prices, especially, for instance, high corn prices that actually made some regions extremely valuable. So I do expect to see some adjustments.

The level of it will really depend on how the whole market plays out the next few months. If the harvest in US and South America can deliver what is expected of it, we are going to see how dramatic that adjustment is going to be. But some adjustment I do expect to see.

Okay, that's clear. Thank you, Julio.

Rodrigo Mugaburu, Morgan Stanley.

I have two questions. One, on the 10,000 hectares that you are targeting to develop, is that on Brazil or that includes Paraguay?

And then the second one, how do you see the market in Paraguay? Do you think that we could see some more farm sales from Cresca in the 2014-2015 season? How are you seeing the market there? Thanks.

Thanks, Rodrigo, for your question, a very interesting one. I will say on the 10,000 hectares, say, roughly 30% to 40% will be Paraguay. The rest of it will be Brazil. And I think that diversification has been paying off. I see Paraguay a much stronger market than in Brazil right now, especially because the region is pretty much cattle, and so the market is pretty actually hot in here.

So I wouldn't be surprised if we have more sales in Paraguay -- I wouldn't. It's not something that we are actually pursuing as though we have to do it. But I wouldn't be surprised. I think the market is somewhat different than Brazil, less -- much -- I would say much less affected from all the bad mood that we have in Brazil right now.

So it's not something I think we are actually pursuing, but I wouldn't be surprised if we have farm sales in Paraguay during this year.

Thanks. And just a quick follow-up. And if you do, do you think that with proceeds you would buy more land in Paraguay? You can still find cheap undeveloped land in the region to do some arbitrage there?

That's for sure. Paraguay has some great opportunities throughout the country. Of course you have to be careful about logistics. So you have some great regions in Paraguay (technical difficulty) although you have to be -- watch out for that.

But Paraguay has a great, great region to develop. So, yes, there are plenty of opportunities in Paraguay, and so we sell there. I think it's -- it could be more acquisitions on top of those sales as well.

As I said, the diversification is paying off as we have for different regions different market dynamics, different price structure. And as I said, it could happen both ways, both sales and acquisitions.

Good. Thank you very much, Julio.

Ravi Jain, HSBC.

My question was basically on growth strategy in Brazil. Do you expect that until the expected correction in land prices there won't be too many land purchases you think from you in Brazil or do you think that you will continue to do some kind of partnerships, JVs to expand your land reserve in Brazil?

Thanks, Ravi, for the question. Always a pleasure to talk to you. I see our strategy in Brazil depending on how the market adjusts. I do believe in the last few years we have seen land prices moving to levels that are very high. I do expect especially undeveloped land to adjust down much more strongly than developed ones. So I do believe if the market stays as it is that a window of opportunity for acquisitions will open in the next 12 to 18 months, and the Company is going to be ready to step in and actually do that.

So as I mentioned, the developed land, the liquidity is not great now. It was better -- much better before. We still have some juice, but fewer. But the market for undeveloped land in Brazil, that is pretty much dried up.

So that is the thing that we like to see. So I do believe in the next 12 to 18 months a window of opportunity will open and we are going to be there to do it -- whether through a JV or direct acquisition, the lawyers will tell us what to do when the moment comes.

That's helpful. Thanks, Julio.

(Operator instructions) There appears to be no further questions at this time, so I would like to turn the conference back over to Mr. Julio Piza for closing considerations. Mr. Piza, you may give your final considerations now.

Thank you. Thank you, everyone, for joining us today. This is our quarter of preparation when we think about what's going to happen in the next nine months, when we are going to be planting and harvesting, everything that we do.

So as I said, I think it's a year to be cautious, to really hold your hands tight, your cards even closer to your chest to see how this is going to turn out to be, how the year is going to turn out to be.

I do believe that it's going to be a tough year from margin perspective, but also it's going to be a year of opportunities, especially for companies such as ours that have a strong balance sheet and a capacity for growth.

So expect to see you again in three months when we are going to be discussing all the planting that we will be -- we will accomplish in the next few months.

So thank you, everyone, for -- thanks, everyone, for joining us and see you in three months. Bye.

Thank you, sir. This concludes BrasilAgro's 1Q 2015 results conference call. You may disconnect your lines at this time. Take care.