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BrasilAgro - Brazilian Agricultural Real Estate Co – ‘6-K’ for 12/31/19

On:  Tuesday, 2/4/20, at 7:32am ET   ·   For:  12/31/19   ·   Accession #:  1292814-20-260   ·   File #:  1-35723

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 2/04/20  BrasilAgro - Brazilian Agricu… Co 6-K        12/31/19    1:2.0M                                   MZ Technologies/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 6-K         Current Report by a Foreign Issuer                  HTML    594K 

For the quarter ended December 31, 2019

_____________________________________________________________________________

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MESSAGE FROM MANAGEMENT

We began 2020 with a great achievement – the merger of Agrifirma into the Company. Agrifirma owns 28,930 agricultural hectares located in western Bahia, which brings synergy and economies of scale with the Bahia cluster operations, as the areas are close to the Chaparral and Jatobá Farms, in addition to other financial and commercial benefits. The transaction was concluded on January 27, 2020 through the exchange of shares at full price of the Net Asset Value (NAV). The initial exchange ratio was R$31.50 per BrasilAgro share based on the Company’s and Agrifirma Holding’s equity of June 30, 2019. As a result of the merger, our portfolio now has 266,053 hectares, 35% of which are developed, 31% are under development and 34% makes up our land bank. We ended the first half of the 2019/2020 harvest year (“6M20”) having concluded, in November, another year of supplying sugarcane, delivering 2.2 million tons, in a harvested area of 26,100 hectares and production capacity of 83.30 ton/ha, accompanied with a net margin of R$2,675/ha. We also finished planting 63,400 hectares of grains and cotton in Brazil and Paraguay. The good climate conditions and rainfall levels as expected favored the good development of soybean and corn crops until the moment, maintaining our production estimates. Due to rainfall levels in the region, we expect cotton production to decrease by 14.9%. Also regarding operating activities, we closed 6M20 with 20,700 head of cattle. Our hedge and sales strategy allowed us to capture commodity prices above our budget, which will positively impact the margins of all crops. The sugarcane result, the healthy development of grain crops and the captured prices maintain our expectation of achieving our 2019/2020 projected budget.

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In 6M20, net income totaled R$61.0 million and adjusted EBITDA stood at R$70.7 million, resulting in net revenue of R$271.9 million, R$24.0 million of which from farm sales and R$247.9 million from the sale of agricultural products.

During our last Investor Day held in early December, we had the opportunity to present the Company’s value creation cycle and its short- and medium-term growth strategy.

BrasilAgro was once again certified by the Great Place to Work as one of the best companies to work for.

We are fully confident that we are on the right track, building a solid and sustainable base without ever losing sight of our purpose of producing food products responsibly.

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OPERATING PERFORMANCE

Definitions: 2Q19 and 2Q20 – quarters ended December 31, 2018 and 2019 respectively| 6M19 and 6M20 – six-month periods ended December 31, 2018 and 2019 respectively | 2018/2019 Harvest Year – fiscal year started on July 1, 2018 and ended on June 30, 2019 | 2019/2020 Harvest Year – fiscal year started on July 1, 2019 and ended on June 30, 2020.

Merger of Agrifirma

On January 27, 2020 we concluded the merger of Agrifirma. We added 28,930 hectares to our property portfolio, appraised by Deloitte in R$205,6 million. The merger was made through share exchanges and the initial share price for the transaction was of R$31.50 per BrasilAgro’s shares, based on BrasilAgro’s and Agrifirma’s equities, as of June 30, 2019. The table below shows a summary of the merger effects:

The mergered areas are located in the West region of Bahia, close to Jatobá and Chaparral Farms and are suitable for grain producion and/or cattle raising, which translates into gains of scale and sinergy with our existing operations and also dilutes our administrative expenses.

In addition to the potential to generate real estate value in the area to be developed (40% of the acquired area), the part tha is already developed (60% of the acquired area) will enable shorter-term real estate gains in a region where we have good liquidity.

Part of the shares involved in the exchange ratio have a 2-year lock-up restriction and, due to the particularity of one of Agrifirma's shareholders - who owns 44.6% of the company - instead of issuing all the shares of the lock-up, the company will issue subscription warrants with the same characteristics of the shares.

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Property Portfolio

The Company’s property portfolio consists of 266,053 hectares across six Brazilian states and Paraguay.

The current mix between own and leased areas of the total production area allows greater flexibility in portfolio management, reducing the volatility of the operating cash flow.

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Market Value of the Portfolio

We review the internal market value of our farms annually, and on June 30, 2019, the market value of our portfolio was R$1.47 billion.

In order to estimate the market value of our farms, we considered for each property: (i) its level of development; (ii) soil quality and maturity; and (iii) agricultural aptness and potential.

We hired the independent consulting firm Deloitte Touche Tohmatsu to conduct a market valuation of our properties. According to its appraisal, as of July 31, 2019, carried out because of the merger announced in November 2019, the market value of the portfolio was R$1.54 billion.

The table below shows the internal market valuation of the portfolio performed by Deloitte Touche Tohmatsu:

During the 2019/2020 harvest year, we concluded the transformation process of 3,200 hectares started last harvest and estimate to transform another 3,000 hectares. We accumulated a total transformed area of 128,600 hectares in 11 years of operation. This represents an average growth of 29% in portfolio transformation, which is the main valuation index of our properties.

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Agricultural Operations

AREA

The table below shows the breakdown of the estimated area to be cultivated by farm in the 2019/2020 Harvest. This quarter, we added 12,784 hectares to the production area due to the addition of Parceria VII Farm and to the merger of the Rio do Meio Farm area, which is currently leased. We also made some adjustments in the planted area mix of cultures compared to the initial estimate considering the good sugarcane results and the climate conditions that affected our soybean planting based on the ideal planting period.

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PRODUCTION

Grains

We expect to increase soybean production by 4.2%, corn production by 71.8% and reduce second corn crop production by 7.5% in comparison with the initial estimate disclosed last quarter. The decisions that led to such changes stemmed from the revaluation carried out based on harvest progress and climate conditions. As of the date of this earnings release, we had already begun harvesting soybean and finished planting corn; second corn crop planting is expected to be finished in February.

Cotton

We project a loss of 14.9% in cotton production in relation to the initial estimate, as climate conditions in Bahia were unfavorable during the crop growth cycle of the harvest.

Sugarcane

In December, we finished harvesting sugarcane. We harvested 2.2 million tons of sugarcane, registering a TCH (harvest tons per hectare) of 83.3.

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Cattle Raising

Cattle raising is a transitory activity for the Company, aimed at the transformation of the area. We have 20,700 head of cattle in the Preferência and the Jatobá Farms and in Paraguay, distributed in 13,721 hectares of already active pasture in Brazil and Paraguay. We reduced our beef production estimate in relation to last year, as the increase in beef prices altered the Company’s initial plan to purchase calves.

In addition to the 13,721 hectares estimated for active pasture in 2Q20, the Company has 3,085 hectares of pasture at the Chaparral Farm, which are part of the area opening strategy, because the grasses increase the organic material level in the soil and reduce impacts that could cause lower productivity in new areas.

We estimate a lower weight gain per day for the 2019/2020 harvest due to changes in management strategies in each farm to improve the margin of this activity.

Other

In order to improve the Company’s results, mitigate operating risks and as a real estate strategy, in 6M20, we leased 21,872 hectares to third parties in the state of Bahia and in Paraguay. The areas were leased to local farmers and the contracts have a duration of up to 5 years with a value of up to 18% of production, and the minimum value is 5 soybean bags per hectare.

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In addition, we have 1,689 hectares of other crops, such as grasses cover crops and sorghum, in order to increase the organic matter and accelerate the maturation of the soil.

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FINANCIAL PERFORMANCE

The consolidated financial statements were prepared and are being presented in accordance with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board.

EBITDA and Adjusted EBITDA

EBITDA is presented based on Net Income adjusted for interest, taxes, depreciation and amortization, pursuant to accounting standards.

Adjusted EBITDA was calculated by excluding biological assets in progress (sugarcane, grains and cotton planted) and adjusted for the harvest’s derivative results and depreciation expenses, including depreciation of fixed assets of the farms, developed areas and permanent crops.

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Operating EBITDA and Adjusted EBITDA

Income Statement

NET REVENUE FROM SALES

Net revenue from sales came to R$271.9 million in 6M20, 14.3% down year on year, due to the accounting of a major sale (9,784 hectares) related to the Jatobá Farm in 1Q19, which was partially offset by higher operating revenue arising from said transaction in the comparison between the periods.

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SALE OF FARMS

In 6M20, we recorded the sales of parts of the Jatobá Farm and of the Alto Taquari Farm, agricultural properties located in the municipalities of Jaborandi, in the Bahia state, and in Alto Taquari, in the Mato Grosso state, respectively. We sold 1,134 hectares (893 arable hectares) of the Jatobá Farm for the nominal value of R$23.2 million (approximately R$25,961/arable hectare) and 85 hectares (65 arable hectares) of the Alto Taquari Farm for the nominal value of R$5.5 million (approximately R$84,817/arable hectare). In the same period last year, we recorded R$181.6 million (nominal value) related to the sale of 9,687 hectares (7,588 arable hectares) of the Jatobá Farm (BA).

The table below shows the revenue from the sale of property:

The variation in the amounts announced through a Material Fact and the recorded values from sales indicate the possibility of changes in prices due to differences between the estimated arable hectares and the actual arable hectares recorded in the final measuring. This possibility is remote and is considered as a variable consideration component, as defined in paragraphs 50 and 51 of IFRS 15. Thus, in order to represent the risk of revenue reversal, the Company did not record the 2.3% related to the amount previously announced until the final measuring of the negotiated area.

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SALE OF AGRICULTURAL PRODUCTS

Soybean revenue increased by R$5.3 million in 6M20 compared to the same period last year, from R$52.9 million, related the sale of 45,900 tons at R$1,152.18 per ton, to R$58.2 million, related the sale of 50,900 tons at R$1,143.13 per ton. The increase in soybean revenue in 6M20 from 6M19 reflects the higher volume sold.

Corn revenue in 6M20 increased by R$16.8 million compared to the same period of the previous year, from R$6.8 million from the sale of 14,800 tons at R$461.18 per ton, to R$23.6 million, from the sale of 62,800 tons at R$376.18 per ton. The increase in corn revenue in 6M20 from 6M19 reflects the higher volume sold. On the other hand, the incorporation of Parceria V in Mato Grosso negatively impacted revenue per ton, as the price practiced in this region is lower, considering the distance for production flow.

Sugarcane revenue in 6M20 increased by R$25.1 million compared to the same period of the previous year, from R$115.1 million from the sale of 1.2 million tons at R$93.56 per ton, to R$140.2 million from the sale of 1.4 million tons at R$97.17 per ton of sugarcane. The increase in per-ton sugarcane price was due to the higher price of the TRS (total recoverable sugar) of sugarcane sold. In the same period, there was also an increase in the price of the TRS per ton of sugarcane harvested, which went from 0.647 R$/kg in 6M19 to 0.663 R$/kg in 6M20.

Cattle-raising revenue in 6M20 increased by R$5.2 million compared to the same period of the previous year, from R$8.3 million from the sale of 4,186 head of cattle at R$5.31 per kilo, to R$13.5 million, which refers to the sale of 6,320 cattle to R$5.34 per kilo.

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Leasing revenue reached R$3.8 million in 6M20 and refers to third-party leases of farms. The contracts have a duration of up to 5 years with a value of up to 18% of production, and the minimum value is 5 soybean bags per hectare.

GAINS OR LOSSES OF AGRICULTURAL PRODUCTS AND BIOLOGICAL ASSETS

Gains or losses of agricultural products

Gains or losses from the variation in the fair value of agricultural products are determined by the difference between their harvested volume at market value (net of selling expenses and taxes) and the production costs incurred (direct and indirect costs, leasing and depreciation).

Harvested agricultural products are measured at their value at the time of harvest considering the market price of the area of each farm.

The table below shows the results of the sugarcane harvest in the fiscal year, including gains (losses) in the value of agricultural products:

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We ended the sugarcane harvest in December 2019 with a volume of 23.2% and net revenue of 31.2%, both superior to the previous harvest. This good result was due to the higher prices of TRS (total recoverable sugar) and Consecana.

Loss from cattle raising corresponded to R$963 thousand, with a production of 1,069.3 tons of meat, 7.3% lower compared to the same period last year. It is worth mentioning that the first four months of each harvest have a historically lower record of weight gain, due to rainfall patterns and supply of pastures.

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Gains or losses of biological assets

Biological assets correspond to agricultural products in formation (not yet harvested) measured at fair value. This value includes net present cash flow, considering the best estimates in relation to productivity, sales prices, selling expenses, direct and indirect costs and leasing.

The biological assets corresponding to ratoons of sugarcane represent the total area to be harvested from April 1 to November 30, 2020.

IMPAIRMENT, NET

A provision to adjust inventories at the net realized value of agricultural products is recorded when the value recorded in inventory is higher than the realization value. The realization value is the estimated sales price during the normal course of business less estimated selling expenses.

On December 31, 2019, the amount recognized corresponds to a loss of R$482,000.

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PRODUCTION COST

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COST OF GOODS SOLD

Due to adjustments to the fair value of agricultural products, period changes in costs are directly linked to the market price of commodities at the time of harvest for the calculation of Total COGS. The comments on each crop below exclude the effect of biological assets appropriated at cost.

Soybean COGS increased by R$29.4 million in 6M20 compared to the previous year, from R$30.5 million, from the sale of 45,900 tons at R$663.75 per ton, to R$59.9 million, from the sale of 50,900 tons at R$1,176.01 per ton. The increase in cost was due to the increase in volume sold, the variation in fertilizer prices, impacted by freight and exchange rates and the drop in the average productivity per hectare, impacted by the farm sales, which decreases the production in mature land in the harvest.

Corn COGS increased by R$13.4 million in 6M20 compared to the previous year, from R$6.3 million, from the sale of 14,800 tons at R$422.56 per ton, to
R$19.7 million, from the sale of 62,800 tons at R$313,87 per ton. The lower cost was due to the higher volume sold and the consequent dilution of fixed cost.

Sugarcane COGS decreased by R$700 million in 6M20 versus the previous year, from R$85.4 million, from the sale of 1.2 million tons at R$69,38 per ton, to
R$84.7 million, from the sale of 1,4 million tons at R$58.67 per ton of sugarcane. The decrease in cost per ton is mainly due to improved productivity at the São José Farm, which resulted in greater dilution of cost.

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Cattle-raising COGS increased R$5.1 million in 6M20 compared to the previous year, from R$8.3 million from the sale cost of 4,186 head of cattle at R$2.0 thousand per head to R$13.4 million from the sale cost of 6,320 head of cattle at R$2.1 thousand per head.

SELLING EXPENSES

In 6M20, we recorded R$5.4 million in selling expenses, an increase of R$2.5 million compared to 6M19, mainly due to the higher volume sold and higher storage expenses in Mato Grosso, after the start of operations at the Parceria V Farm.

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GENERAL AND ADMINISTRATIVE EXPENSES

In 6M20, general and administrative expenses rose by 11.3% over the same period in the previous year, from R$17.1 million to R$19.0 million. Higher depreciation and lower lease and rental expenses reflect the lease reclassifications made based on IFRS 16. The increase in personnel expenses is due to the payment of taxes of the Long-Term Stock Option Incentive Plan approved by the Company in 2017.

Other expenses include costs regarding telephony services, building maintenance, registry, insurances, shares listing and others.

OTHER OPERATING INCOME / EXPENSES

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FINANCIAL RESULT

The consolidated financial result is composed of: (i) interest on financing; (ii) exchange variation on the offshore account; (iii) the present value of the Araucária, the Alto Taquari and the Jatobá Farms’ sales receivables, fixed in soybean bags, and the leasing of sugarcane areas; (iv) the result from hedge operations; and (v) bank fees and expenses and income from cash investments and cash equivalents.

The restatement of fair value, in the amount of R$5.9 million in 6M20, shows the variation in the amount to be received due to the sales of the Araucária, the Jatobá and the Alto Taquari Farms, denominated in soybean bags, and the variation of Consecana’s price in the lease of the Parceria IV Farm.

The derivatives result reflects the commodities hedge operations result and the impact of the exchange variation on cash, which was partially dollarized in order to maintain purchasing power in regard to inputs, investments and new acquisitions, which have a positive correlation with the U.S. currency. In 6M20, the result of derivative transactions was a negative R$2.0 million, R$1.2 million of which are related to currency operations and R$3.2 million are related to operations with commodities. In 6M19, derivative operations totaled R$8.5 million, R$5.6 million of which related to currency operations and R$2.9 million to operations with commodities.

The decrease in other financial income/expenses is chiefly due to the SELIC rate reduction. The Company’s cash position went from an average cash flow of R$93.6 million in 6M19 to R$104.2 million in 6M20.

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DERIVATIVE OPERATIONS

Our risk policy primarily aims to hedge the Company’s cash flow. In this context, we are concerned not only with the main components of our revenue, but also the main components of our production costs. Therefore, we monitor on a daily basis: a) the international prices of the main agricultural commodities produced by the Company, usually expressed in U.S. dollars; b) the base premium, i.e. the difference between the international and domestic commodity price; c) exchange rates; and d) the prices of the main components such as freight, fertilizers and chemicals, which can substantially impact costs.

The points analyzed when deciding on the price and margin hedging strategy and tools are listed below:

•       Estimated gross margin based on the current price environment.

•       Standard deviation from the estimated gross margin for different pricing strategy scenarios.

•       Analysis of the estimated gross margin in stress scenarios for different hedge strategies.

•       Comparison between current estimates and the Company’s budget.

•       Comparison of the estimated gross margin and the historical average.

•       Market expectations and trends.

•       Tax aspects.

HEDGE POSITION ON JANUARY 27, 2020

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Balance Sheet

NET ASSET VALUE – NAV

CASH AND CASH EQUIVALENTS

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CLIENTS