Q & A Highlights

Q: How is SLC Agricola preparing for the challenging climate scenario, particularly the forecast of a very strong El Nino, and what is the company's view on its current leverage level of 3.09 times adjusted EBITDA? A: CEO Aurelio Pavinato detailed a multi-pronged mitigation strategy for El Nino, which is expected to cause drought in central-north Brazil. Measures include increasing soil coverage to retain moisture, adjusting planting windows (e.g., planting cotton earlier in Bahia), and modifying fertilizer application schedules. He highlighted that the company is far more resilient than in 2016, citing 100% mature land, 25,000 hectares of irrigation (representing 50,000 hectares of double-cropped area), and expecting significantly lower losses in a similar scenario. CFO Ivo Brum acknowledged the leverage is "slightly uncomfortable" but was planned due to working capital needs from the Sierentz acquisition and first-half supplier payments. He expects significant deleveraging in the second half with harvest cash flows and is considering asset sales without leaseback to accelerate the process.

Q: Given the recent recovery in cotton prices, is the company planning to increase cotton acreage in its mix, and what is the outlook for the soybean area in Brazil? A: CEO Pavinato stated that the company conducts a farm-by-farm assessment to determine the best returns and will announce its crop mix in October. He noted that planting cotton as a second crop is advantageous. Regarding soybeans, he believes the planted area in Brazil will be stable for the first time in a decade, which is highly positive for prices. He argued that current commodity prices are not sufficient to drive expansion given a 28% increase in US production costs since 2020, leading to tight global inventories and suggesting the trough in commodity prices is behind us.

Q: What is the company's strategy regarding fertilizer purchases, and how will it manage its debt amortization schedule given the current interest rate environment? A: CEO Pavinato confirmed the company got the timing right on fertilizer purchases, securing 100% of phosphate and 90% of potassium chloride at a 4% discount in dollar terms, and 70% of nitrogen at the trough of the price curve. This locks in adequate cost levels for the next crop. CFO Ivo Brum stated that while the company pays off BRL1.2-1.3 billion annually for crop expenses, it is considering taking on dollar-denominated loans at 6-7% interest to lengthen its debt profile and manage the amortization schedule more effectively.

Q: What were the main drivers behind the record yields in soybeans and cotton, and are these results sustainable? A: CEO Pavinato attributed the record soybean yield of 4,146 kg/ha and strong cotton yields to consistent improvements in varieties and management, moving above the historical trend line. He noted that the soybean harvest had even greater potential but was impacted by excessive rainfall during harvest. He expressed optimism that yields will continue to increase, setting the company apart from international competition, and highlighted that the company's efficiency is what sustains profitability during periods of depressed commodity prices.

Q: What is the company's target for the mix of owned versus leased land, and how flexible is it in achieving this target? A: CEO Pavinato reiterated the strategy of maintaining a mix of 1/3 owned and 2/3 leased areas. While there may be oscillations, the goal is to grow operations without allocating excessive capital to land, which has low short-term returns. He stated the company is flexible and could adjust the mix, potentially going below 25% owned land, depending on growth opportunities in leased areas. The primary focus remains on operational efficiency and capital allocation, with a long-term leverage goal of below 2 times.

Q: What is the outlook for the cotton market in the long term, and how are geopolitical factors influencing prices? A: CEO Pavinato explained that the rise in polyester prices, a key competitor, supports cotton prices. He noted that global production is not meeting demand, with reduced crops in the US, India, and Australia (due to El Nino). He believes the critical period for cotton pricing is behind them, and current prices better remunerate Brazilian growers. He sees India becoming an important client and expects Brazil to continue gaining market share, with the trough in prices in the past.

Q: What are the expectations for CapEx and capital allocation for 2027, and will the company pursue further acquisitions? A: CFO Ivo Brum stated that aside from ongoing irrigation investments (starting the Paladino project) and maintenance CapEx, there are no major investments planned for next year. The company will decide on potential growth opportunities, such as acquisitions, by March or April next year. Regarding the Radar Groupo, he noted they may have more assets for sale, but negotiations could be lengthy, and the company has time to exercise preference rights on leases until 2029.

Q: Can you explain the increase in SG&A expenses and freight costs in the first half? A: CFO Ivo Brum attributed the increase to several factors: higher transport costs due to geopolitical issues and diesel prices, the adoption of the CIF methodology from Sierentz, increased costs for eucalyptus biomass, and non-recurring items such as payments for the BTG transaction and negotiations for the farm purchase in June. He also noted the incorporation of the Sierentz team added to SG&A, but expects cost reductions as the integration completes and systems are unified.

Q: How is the potential delay in the biodiesel mandate (B16) affecting soybean demand and premiums? A: CEO Pavinato stated that higher oil prices favor biodiesel, creating consistent demand for soybeans even with the current B15 mandate. He noted that domestic prices in Mato Grosso are now higher than export prices due to strong demand from the biodiesel industry. A move to B16 or B17 would further strengthen domestic demand and support premium prices, particularly in regions with a biodiesel industry.

Q: Given the higher cost scenario, is the company considering reducing fertilizer use, which could lead to lower yields? A: CEO Pavinato clarified that the company is not reducing fertilizer use for the next crop season, focusing instead on "maximum economic efficiency" rather than the highest possible agricultural yield. He stated that fertilizer application will only be adjusted if there is a lack of water, as that would make the expense unprofitable. Otherwise, the company will fertilize areas as usual, ensuring yields are not compromised

For the complete transcript of the earnings call, please refer to the full earnings call transcript .