SLC Agrícola S.A. (SLCE3) Earnings Call Transcript

[Technical Difficulty] Financial Planning and Investor Relations Manager. Joining me today are our CEO, Aurelio Pavinato; and our CFO and IRO, Ivo Brum. It's a privilege to be with you this morning. Please note that this conference call is being recorded and will be made available on the company's IR website, where you will also find the presentation. [Operator Instructions] We would like to emphasize that the information contained in this presentation as well as any statements made during the conference call regarding SLC Agricola's business outlook, projections and operational and financial targets are based on the management's beliefs and assumptions as well as on information currently available. Forward-looking statements are not guarantees of their performance. They involve risks, uncertainties and assumptions as they relate to future events that may or may not occur. Investors should understand that general economic conditions, market conditions and other operational factors may affect SLC Agricola's future performance leading to results that differ materially from those expressed in such forward-looking statements. I would now like to turn the floor over to our CEO, Aurelio Pavinato, to begin our presentation. Pavinato, please go ahead.

Good morning. Good morning, everyone. Thank you, Andre. Welcome to SLC Agricola's Second Quarter 2026 Earnings Conference Call. We appreciate the participation of our shareholders, analysts, investors and all other participants. Let's please move to Slide 4, where we'll discuss the cotton market. The first 6 months of 2026 were marked by significant recovery in international cotton prices following a long period of depressed prices. This scenario directly affected international polyester prices, which, given its competition with cotton and given the textile industry's ability to switch between these 2 raw materials, helped support the appreciation of the natural fiber. From a fundamentals standpoint, global cotton consumption for the 2026-'27 crop season is estimated at approximately 123 million bales compared with a projected production of 117 million bales. Therefore, there is a global deficit of approximately 5.3 million bales. Brazil is expected to continue gaining market share in the international market, consolidating its position as one of the top global players. The 2025-'26 crop year already reflects this trend with Brazilian cotton exports registering volumes above the historical average for the period. Now let's move to Slide 5 to talk about soybeans. Soybean prices, both on the CBOT spot market and at the Paranagua-CEPEA benchmark have recovered significantly through 2026. The recovery in global prices as reflected in the CBOT benchmark has been driven largely by the outbreak of the conflict between the United States and Iran and the resulting rise in oil and energy prices. Against the backdrop of growing concerns related to the decarbonization of the global energy mix and the increase of use of renewable fuels in the mix, we see the correlation between soybean oil prices on the CBOT and crude oil prices strengthening. This provides important support for soybean prices. Globally, the USDA projects a tighter supply and demand balance for the '26-'27 crop season with the smallest surplus in the past 5 years. Demand for Brazilian soybeans also remains strong with national exports in March through -- in January through March, broadly in line with the volumes recorded in the same period in recent years. This confirms both robust global demand and the competitiveness of Brazilian soybeans in international markets. It's also important to monitor potential tariff changes imposed by the United States on its trading partners, similar to what occurred with China during Donald Trump's first presidential term. At that time, Brazilian soybean exports to China benefited relative to U.S. exports. Over the past few years, particularly since 2018, Brazil has established itself as a consistent supplier to the Chinese market. Let's please now advance to Slide 6, where we'll talk about corn. Corn prices in the CBOT spot contracts and in the Brazilian domestic market have shown significant volatility throughout 2026. Corn prices in Brazil have found solid support from growing domestic demand. And this has been driven in turn by the expansion of the corn ethanol industry. As a result, Brazilian exports have been facing increasing competition from the domestic market where prices have been more attractive. Globally, the corn market is expected to remain in a deficit with demand exceeding supply by 24 million tonnes. This is the largest deficit in the past 6 years, according to USDA data. Meanwhile, the ongoing Russia-Ukraine conflict remains an important factor in the global corn trade given Ukraine's position as one of the largest world exports. This situation remains critical for global export flows as Argentina, Brazil and Ukraine, together with the United States are among the world's leading corn suppliers. Let's please now go to Slide 8, where we'll discuss the status of the '25-'26 crop season. We have completed the soybean harvest with a record average yield of 4,146 kilograms per hectare. This performance is 4.7% higher than the previous cycle and 2.7% above our initial projection. More important than the record itself is the fact that this result was achieved while expanding the soybean acreage. This demonstrates the efficiency of our operations and the benefits of our investments over the past few years. As a result, we have achieved a yield approximately 12% higher than the national average. We have now harvested 62% of our cotton crop and the outlook remains very positive. We expect one of the best cotton crops in the company's history with yields approximately 12% higher than last year's crop season, reflecting the strong crop development we have seen so far. For second crop, corn, we have now harvested 90% of the crop. The crop faced weather-related challenges due to delayed planting and uneven rainfall, particularly in Maranhao and the Araguaia Valley in Mato Grosso. Even so, we continue to expect yields of approximately 6,798 kilograms per hectare, demonstrating the resilience of our operations in spite of less than favorable conditions. Let's move now to Slide 9, for an update on our hedge position for the '25-'26 crop season. We continue to maintain a high level of hedging for the '25-'26 crop. We have already hedged 90% of our soybean, 94% of our cotton and 54% of our corn. This increases revenue visibility and reduces our exposure to price and market volatility. I will now give the floor to my colleague, Ivo Brum, for a few comments on our financial performance. Ivo, please proceed.

Thank you, Pavinato. Let's please move to Slide 11, where we share some highlights from our income statement. Net revenue for the semester reached a record BRL 4.4 billion, up 6% year-over-year. This performance was driven mainly by higher volumes of cotton, soybean, corn and cattle being sold. Gross profit reached BRL 1.9 billion, an 8.8% increase, mainly reflecting improved operating performance in cotton and corn. Adjusted EBITDA totaled BRL 1.3 billion in the first half, 15% from first half '25, mainly reflecting lower gross profit from soybeans and cotton seeds. In addition, selling and administrative expenses increased. Now let's move to Slide 12, where we have a summary on our CapEx for the quarter. During the first half of the year, we continued to execute our investment plan to expand production capacity and strengthen operational resilience. We invested BRL 155 million in irrigation, one of our key levers to mitigate weather-related risks, improve stability in production and support productivity gains. Following the end of the quarter, we announced the acquisition of 8,900 hectares of arable land from Groupo Radar. We also renewed leases covering 8,700 hectares with the new tenants, ensuring that we can continue to operate this land. As a result, 5,300 are leased through the '29-'30 crop and around 1,000 hectares are leased through '26-'27. The remaining 2,500 hectares have been re-leased for additional 15 years, starting with the expiration of the current lease at the end of '26-'27 crop at a cost of 19.5 sacks per hectare. We have also opened a new cotton gin at Fazenda Parnagua. These initiatives expand our operational and industrial capacity. Now on Slide 13, we discuss our debt position. Regarding our capital structure, adjusted net debt ended the quarter at BRL 7.5 billion, while leverage stood at 3.09x adjusted EBITDA. This increase reflects our operational growth, higher working capital requirements and the investments made in the period. Despite the increase in net debt, which, of course, reflects our expansion, we maintain a solid capital structure and a balanced debt profile. We have paid off most of the costs associated with the '25-'26 crop and 78% of our debt was classified as long term, similarly to 2025. This reflects our discipline and financial management and our focus on maintaining a capital structure that supports sustainable growth. Now turning to Slide 14. We will give you an assessment of our land portfolio. We have completed a reevaluation of the company's land portfolio. Our own property, together with those held through private equity partnerships were valued at BRL 13.5 billion, reflecting the continued appreciation in the average price of land per hectare. Over the past 5 years, the assets have appreciated 8.4%. At the end of June 2026, net asset value stood at BRL 27.12 per share, representing a significant discount to the company's market value. Continuing the presentation, I will now turn the floor over to Pavinato to discuss the outlook for the '26-'27 crop.

Okay. Let's move now to Slide 16 for an update on fertilizer purchases. As we move through the current crop season, we continue to make progress in planning for the '26-'27 crop. We have already secured 100% of our phosphate requirements, 90% of our potassium chloride, 70% of our nitrogen fertilizer needs and 96% of our crop protection. On Slide 17, we discuss our hedging for the '26-'27 crop. We have continued to manage our risks carefully, increasing our hedged positions for the next crop, always protecting margins and reducing our exposure to market volatility. Our current hedge position covers 49.2% of soybeans and 55% of cotton, including committed volumes. Now finally, let's move to Slide 19, where we discuss some ESG highlights and awards. For the fifth consecutive year, we have been recognized among the best companies in Brazil in Exame's Best ESG awards, further strengthening our track record in ESG. We have also identified 5 farms with a negative carbon balance, showing that productivity and sustainability can walk hand-in-hand. And finally, we have ranked 15th in the 2026 Great Places to Work, agriculture ranking, improving from the place we had in 2025, which was the 19th. Now we are ranking 15th among agribusiness companies. We thank you all for watching, and we will now open the Q&A session. Andre?

[Operator Instructions] Our first question comes from Gabriel Barra, Citi.

Can you all hear me?

Yes, we hear you fine.

Well, there are 2 things. I think that when you're talking about agriculture, I think that this question is something that you cannot walk away from. We see a very challenging climate scenario. Several companies are preparing for a more challenging climate scenario. So I would like to know what measures have you been discussing to overcome any risks? I think that, for example, your investment in irrigation is a sign of what you're planning. But are you thinking of doing something more specific in the second half, especially in relation to the next crop season? How are you going to protect against this uncertain scenario? Now we see now that the company is at a higher leverage level even in comparison with the previous year, you're 0.7 points higher than last year. And Ivo made reference to the investments you made and the current working capital requirements. But this is a level that makes us a little more unprofitable considering also the interest rates. So could you give us your perception on the current leverage? And in your vision, what should be the leverage by the end of the year? Is this a reason for discomfort in your view that could lead you to take any measures to reduce the leverage and also face the higher interest rates that are expected for next year?

Gabriel, such easy question as always. Okay. So I'll answer the question about El Nino, and then Ivo will talk about the financial indicators and leverage. Well, El Nino is something we're not facing for the first time. and we know that there is an effect in our operations. And this year, we have the forecast of a very strong El Nino. And this, of course, causes a concentration of rainfall in the south of Brazil and more drought in the central North. So we're preparing for it. So what could be done to mitigate any damage caused by El Nino? Well, the damage be greater or lesser. We've had some El Nino years with very little damage in Mato Grosso. It will rain less. And in Mato Grosso, it always rains too much. It doesn't mean that we're going to have a drought. And now in Bahia, it doesn't really rain too much. So those are the 2 extremes, Mato Grosso, Bahia. We also have Mato Grosso do Sul, which is usually not affected by El Nino, and Maranhao as well. Even though the Northeast in general is affected, we have a shorter Indian summers in Maranhao. So at any rate, we could have some drought. So what could be done in terms of mitigation? Just to give you an example of what we're doing today, increasing soil coverage or also avoiding turning of the soil is something that we could do because this -- of course, this leads to loss of moisture, that could affect germination. So we changed our management to maintain more moisture in the soil. So we've been investing greatly in soil coverage. Our system has a much higher capacity of soil -- of water retention in the soil than in the past. Also, the planting window requires adjustments. So in Bahia, we planted cotton in December. This year, we have to plant sooner because if there is a shortage of rainfall, the crop will have developed enough to avoid greater damage. So we'll adjust the planting windows also to mitigate the effect of an Indian summer in the middle of the cycle that could lead to crop failure. Moreover, adjustment in inputs. Am I going to use up all of my potassium in the first application? No, I will do it in 2 parts. And the same with nitrogen. Usually, we apply in cotton 3 times. So we'll make adjustments depending on crop development. It's a strategy to retain moisture and to reduce cost. This is what we can do. And of course, making the most of whatever rainfall there is, and always following the weather forecast to avoid greater losses. This is what we'll do to reduce any damage that might occur.

And by the way, Pavinato, maybe you could talk about our area of distribution.

Yes, yes. If we compare the situation to 2016, where we had losses of 20% of our output, we saved 5%. So in the end, we had losses of 15%. In 2016, we had a much greater concentration in the Northeast than in the Southwest. And we had more immature land from Cerrado to planted areas from -- in a range from 10% to 25%. Now we have 100% of these areas as mature land. So the system is far more resilient. In 2016, some crop areas in Bahia were producing 45 sacks of soybeans and young areas produce 10 or 12 sacks of soybeans. So this, of course, shows the magnitude of difference. And in 2016, there was almost no irrigation installed in Bahia. And now with the project we are completing at Piratini, we have 25,000 hectares under irrigation in the farms where risks were higher. So the 25,000 hectares, since we have 2 crops a year, this represents 50,000 hectares in Bahia and Goias. This is where we have most of the irrigation that was nonexistent in 2016. So in a similar damage scenario, we expect that the losses in '27 should be much lower than they were in 2016.

Well, about leverage. At the time of acquisition of Sierentz, we knew that we would see a pressure on our working capital requirements. We pay off most of the suppliers in the first half of the year. So having a net debt over EBITDA ratio of 3x, this is no surprise to us. Now at the end of the cotton harvest and corn and with the deliveries in the second half and also with the conclusion of the soybean harvest, we believe that there will be a significant leverage. Actually, we are wondering whether we need to get more leverage to pay off the land that we acquired in June, of course, we still are pending payments because this is a period of very high cash generation. So the trend is downward on the net debt over EBITDA ratio. If we want to step up our deleveraging, we also have the opportunity of selling, but we would like to do this without leaseback because we know the areas, we know about the potential of these areas. So it would be not good for us to lose an area that's already in operation. This is something we commented on our last communication. We might sell, but without leaseback. And of course, firstly, we have to find the right buyer. So a leverage of 3x makes us slightly uncomfortable, but it was already in planning.

Thank you, Barra. Our next question, Mr. Guilherme Palhares.

Congratulations, Pavinato, 33 years with the company. And I would like to hear your thoughts on 2 points. Well, the timing for fertilizer purchases, you made a large nitrogen purchase. I think that you did it right on time, urea and nitrogen in general. Well, you had a window of opportunity and you seized it. And I would like to hear a little bit of a follow-up about your debt amortization schedule. Do you think there's anything that you can do in that sense because there's a concentration of payments in '26-'27.

Thank you very much, Guilherme, for your question. Fertilizer purchases, yes, we got the timing right. We had already purchased all of the phosphorus before the outbreak of the war. And phosphorus is what is really going through a structural cost change. So in fact, and with potassium, potassium was not deeply affected by the conflict. We had already purchased it on the early days of the conflict. And this combination of phosphorus and potassium, we were able to buy with a reduction of 4% in dollar prices. So once again, we got the right time in our purchase of nitrogen. We bought 70% of our volume at the trough of the curve. Then it went up again. It's going down again. So we still have 30% to buy, something that we'll only use next year. So we were able to form our prices at adequate levels for the next crop season. We don't run the risk of witnessing a very expressive cost increase for the next crop year. We believe that with the increases in prices in the international market -- we believe that prices actually will outpace the increase in cost.

Well, about the debt amortization schedule, every year, we pay off between BRL 1.2 billion and BRL 1.3 billion for the crop year expenses. Of course, we are trying to lengthen our debt profile and also, we don't see a reversal of the trend of interest rates in the near-term. Now we're a little bit more optimistic. So we are thinking of taking some loans in dollars to lengthen our debt profile because in dollars, the interest rates are around 6% to 7% a year. So with this, you could pay off the interest rates and you leave the bulk to pay at the amortization. So that renegotiation is something that's very common place since our debt is financed by the crop, of course, this is the only difference.

Okay. Pavinato, just going back to something you said and also thinking of the response you gave to Barra in a high-cost scenario, not everybody has been making purchases of fertilizers as well as you have. So maybe this will have an impact because there's a climate risk and inflation. So when you think of your hedging strategy, are you thinking of underutilizing imports? This could lead to lower yields, perhaps?

No. No. We are using the maximum economic efficiency, which is not the same as the highest agricultural yield rate. So we always take the economic factors into account. We are not reducing the use of fertilizer in the next crop season. Of course, there are some one-off adjustments that we make depending on soil fertility. But as I said, we will only stop applying fertilizer if there's low water, right? Because this would be an expense with no return on investment. So basically -- so it's going to depend on the drought. If there is rain, enough for plants to develop, then we're going to fertilize the areas as we usually do.