LND Brasilagro Cia Brasileira De Propriedades Agricolas

PRODUCTION

Grains

Sugarcane

In April, we began harvesting the new sugarcane crop. So far, 1.7 million tons of sugarcane have been harvested, registering a TCH (harvest tons per hectares) of 85.2. During the 2019 harvest, wildfires affected some areas of ratoons of sugarcane (700 hectares at the Alto Taquari Farm and 1,800 hectares at the São José Farm). We took corrective measures to intensify the nitrogen fertilization of the affected areas to mitigate the effect of fire in the ratoons and estimate minor yield impacts.

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Cattle raising is a transitory activity for the Company, aimed at the transformation of the area. We have 19,000 head of cattle in the Preferência and the Jatobá Farms and in Paraguay, distributed in 13,351 hectares of already active pasture in Brazil and Paraguay.

In addition to the 13,351 hectares estimated for active pasture in 1Q20, 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 1Q20, we leased 13,778 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.

 In addition, we have 1,358 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 and grains 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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In 1Q20, net revenue from sales reached R$185.0 million, 23.5% lower than the same period of the previous year, due to the accounting of a large sale (9,784 hectares) of the Jatobá Farm in 1Q19, partially offset by the increased revenue from the operation in the comparison between the periods.

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SALE OF FARMS

In 1Q20, the Company recorded the sale of a plot on the Jatobá Farm, an agricultural property located in the municipality of Jaborandi, Bahia. A total of 1,134 hectares (893 arable hectares) were sold, corresponding to the nominal value of R$23.2 million (~R$25,961/arable hectare). In the same period of the previous year, a total of R$173.8 million (nominal value) was recorded, referring to the sale of 9,784 hectares (7,485 arable hectares) of the Jatobá Farm (BA).

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

The variation in the R$23.2 million disclosed through Material Fact and the R$22.7 million recorded in the most recent sale of the Jatobá Farm reflects the possibility of change in price due to differences between the estimated arable hectares and the arable hectares verified in the final measurement. This is possibility is remote, and is considered as a variable consideration component, as defined in paragraphs 50 and 51 of IFRS 15. Therefore, in order to represent the risk of revenue reversal, the Company does not recognize the percentage of 2.3% of the previously disclosed value until the final measurement of the negotiated area.

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Soybean revenue increased by R$12.2 million in 1Q20 compared to the same period last year, from R$39.8 million, from the sale of 32,200 tons at R$1,235.56 per ton, to R$52.0 million, from the sale of 45,300 tons at R$1,146.67 per ton. The rise in sales of soybean in 1Q20 compared to 1Q19 reflects the increase in volume sold. On the other hand, the incorporation of Parceria V in Mato Grosso impacted revenue per ton, as the price practiced in this region is lower, considering the distance for production flow.

Corn revenue in 1Q20 increased by R$7.0 million compared to the same period of the previous year, from R$1.9 million from the sale of 3,800 tons at R$489.73 per ton, to R$8.9 million, from the sale of 24,100 tons at R$367.43 per ton. The growth in corn revenue in 1Q20 compared to 1Q19 reflects the increase in volume sold. On the other hand, the incorporation of Parceria V in Mato Grosso impacted revenue per ton, as the price practiced in this region is lower, considering the distance for production flow.

Sugarcane revenue in 1Q20 increased by R$17.8 million compared to the same period of the previous year, from R$74.1 million from the sale of 848,600 tons at R$87.34 per ton, to R$91.9 million from the sale of 992,100 tons at R$92.66 per ton of sugarcane. The increase in per-ton sugarcane price was due to the higher price of the TRS (total recoverable sugar) of sugarcane sold. In the same period, there was also an increase in the price of the TRS per ton of sugarcane harvested, which went from 0.654 R$/kg in 1Q19 to 0.671 R$/kg in 1Q20.

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Cattle-raising revenue in 1Q20 increased by R$4.0 million compared to the same period of the previous year, from R$2.0 million from the sale of 1,103 head of cattle at R$4.70 per kilo, to R$6.0 million, which refers to the sale of 3,348 cattle to R$5.35 per kilo.

Leasing revenue reached R$2.1 million in 1Q20 and refers to third-party leases of Farms. These lease contracts have a duration of up to 5 years with value of up to 18% of production, and the minimum value is 5 soybean bags per hectare.

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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By October 30, the harvest of the 2019 sugarcane crop in the Midwest region had been completed. By the end of November, we expect to have concluded the harvest of the remaining 8% of the estimated volume at the São José Farm.

Loss from cattle raising corresponded to R$1.4 million, with a production of 491.8 tons of meat, 5.0% 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) and cattle, measured at the net present value of the expected cash flow from these products. The calculation of fair value considers the best estimates in relation to sales prices, discount rates, direct and indirect costs, leasing, yields and selling expenses. In the first quarter, biological assets from soybean, corn and cotton crops are not yet accounted for.

The biological assets corresponding to sugarcane represent the total area to be harvested from April 1 to November 30, 2019.

IMPAIRMENT (REVERSAL OF PROVISIONS OF THE RECOVERABLE AMOUNT OF AGRICULTURAL PRODUCTS, NET)

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

On September 30, 2019, the recognized amount corresponded to a loss of R$1.3 million.

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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 the realization of the fair value of biological assets.

Soybean COGS increased by R$25.2 million in 1Q20 compared to the previous year, from R$21.9 million, from the sale of 32,200 tons at R$679.80 per ton, to R$47.1 million, from the sale of 45,300 tons at R$1,039.85 per ton. The increase in cost was due to the increase in volume sold (R$9.0 million), the variation in fertilizer prices, impacted by freight and exchange rates and the drop in productivity per hectare (R$16.2 million).

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Corn COGS increased by R$6.0 million compared to the previous year, from R$1.6 million, from the sale of 3,800 tons at R$424.45 per ton, to R$7.6 million, from the sale of 24,100 tons at R$317.24 per ton. The decrease in cost was due to the higher volume sold and the consequent dilution of fixed cost.

Sugarcane COGS increased by R$6.3 million in 1Q20 versus the previous year, from R$53.2 million, from the sale of 848,600 tons at R$62.73 per ton, to R$59.6 million, from the sale of 992,100 million tons at R$60.05 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.

Cattle-raising COGS increased R$4.1 million in 1Q20 compared to the previous year, from R$2.1 million from the sale cost of 1,103 head of cattle at R$1.8 thousand per head, to R$6.2 million from the sale cost of 3,348 head of cattle at R$1.9 thousand per head.

In 1Q20, we recorded R$3.9 million in selling expenses, an increase of R$2.7 million compared to 1Q19, 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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In 1Q20, general and administrative expenses decreased by 11.0% compared to the same period of the previous year, from R$10.3 million to R$9.2 million. The 49.4% decrease in lease and rental expenses reflects the reclassifications established by IFRS 16.

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

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The consolidated financial result is composed of the following items: (i) interest on financing; (ii) the impact of the 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 returns on cash investments.

The realization of the present value of assets and liabilities in 1Q20, in the amount of R$7.6 million, 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 1Q20, the result of derivative transactions was a negative R$2.7 million, R$7.8 million of which are related to currency operations and R$5.1 million are related to operations with commodities. In 1Q19, derivative operations totaled a negative R$1.2 million, R$2.6 million of which are related to currency operations and R$1.4 million related to operations with commodities.

The rise in other financial income / expenses is due to the SELIC rate reduction. The Company’s cash position went from an average cash flow of R$80.0 million in 1Q19 to R$102.2 million in 1Q20.

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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, that can significantly 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.