Good morning, everyone, and please be welcome to SLC Agrícola's 3Q 2022 earnings conference call. My name is Rodrigo Gelain. I am Financial Manager and Investor Relations Officer. Together with me, we have our CEO and IRO, Ivo Brum. It's a privilege to be with you this morning. We would like to inform you that this conference call is being recorded and will be available from the company's IR website together with the presentation. We would like to remind you that if you need simultaneous translation, we have this tool available in Zoom. Just click on the globe marked with interpretation that you will find in the lower half of the screen. Please choose your language of choice in the drop-down menu, English or Portuguese. For those listening in English, you can mute the original audio in Portuguese by clicking the mute original audio option.
We would like to request that you submit any questions for the Q&A by pressing the Q&A button in the lower part of the screen. Following our rules, your names will be announced before you can ask your question live. At that time, you will be prompted to activate your microphone and camera. If you prefer not to open your microphone and camera, please write no mic at the end of your question so that I can read it aloud. We would like to remind you that the information contained in the presentation and any statements that will be made during the conference call regarding the business prospects, projections, and operational and financial goals of SLC Agrícola reflect the beliefs and assumptions of the company's management, as well as information currently available. Forward-looking statements are not performance guarantees.
They involve risks, uncertainties, and assumptions as they refer to future events that depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions, and other operating factors may affect the future performance of SLC Agrícola and lead to results that differ materially from those expressed in such forward-looking statements. With this, I would like to turn it over to our CEO, to Mr. Ivo.
Good morning. Thank you for participating in the 3Q 2022 SLC Agrícola earnings conference call. If you please, let's start in slide three for some comments on the cotton market outlook. The third quarter of 2022 was marked by a negative correction in cotton quotes resulting from increased risk aversion since a global economic recession could impact fiber consumption.
We made strategic advances in hedging to the extent that we have 57.9% of the cotton to be produced in the 2022/2023 crop sold at a price of $0.9101 per pound of weight. The expectation for the next crop year, 2022/2023, is expected to reach 115.4 million bales against a production scenario of 118 million bales. Consequently, in the global balance of supply and demand, the current cycle will close with a surplus of approximately 2.6 million bales after two consecutive cycles of consumption exceeding supplies. The current scenario reflects the phenomena observed in the North America cotton growing, in which crop abandoned reached the highest level in recent historic series, resulting from the extreme drought observed throughout the year. Now let's turn to slide four. Soybean prices in CBOT spot contracts and the prices paid for the oil seed in the Paranaguá CPA.
They showed similar trajectories throughout the third quarter of 2022. With the previous cycle, 2021/2022, marked by losses resulting from the dry climate in the southern states of Brazil, Argentina, and Paraguay, soybean production in South America showed losses of approximately 31 million tons. For the 2022/2023 crop year, the USDA estimates that the world balance between supply and demand production should surpass consumption by approximately 10.8 million tons, partially replenishing stocks in the last three harvests. Watching how the South American soybean crop develops will be of fundamental importance because the influence of the La Niña climate event, which is historically associated with lower rainfall, may change the current estimated balance. In the case of soybean, we have hedged 59% of the 2022/2023 crop year with a selling price of $14.57 per bushel. In slide five, we would like to talk about the corn market.
Corn prices in the CBOT spot contracts and in the Brazilian domestic market showed significant volatility throughout the third quarter of 2022. In a quarter marked by the irregular development of the U.S. cereal crop, adverse weather ended up impacting production in the country by approximately 14 million tons. The world still suffers from the uncertainty related to Ukraine's exports due to the conflict Russia and Ukraine. In the South American crop, we have some weather conditions that tend to be adverse, if confirmed. Thus, the global exports market is enveloped in high uncertainty, and we are hedged in 51.6% of the 2022/2023 crop at a price of BRL 61.75 per bag. Let's please advance to slide seven to discuss the 2021/2022 crop operating performance.
We updated the final yields of the 2021/2022 crop year, and there was a slight drop in second-crop cotton seed, and second-crop corn compared to the forecast released in 2Q release. This was caused by a water deficit, which started in March in part of the state of Bahia and Mato Grosso. In addition, we had low temperatures, atypical for the region, including the formation of frost in Mato Grosso in May, which hampered the development of plants. On the other hand, in Maranhão, we achieved excellent yields. In cotton, we reached 2,186 kg per hectare of land, and in corn, 7,466 kg per hectare, which validates our geographical diversification strategy. In slide eight, we show you the sales track record in the seed business. To date, sales and domestic consumption of soybean seeds have reached approximately 910,000 bags, 200,000 seeds.
Cotton seed presented a sales volume plus on consumption of 92,675 bags. Now I'll turn it over to Mr. Gelain, who will comment on the main financial indicators in this quarter.
Thank you very much, Ivo. Could we please turn to slide 10, where we turn to some of the highlights in our financial statements. Firstly, we would like to highlight that the data for 3Q 2021 versus 3Q 2022 are already comparable, as we incorporated the Terra Santa Agro operation as of 2Q 2021. To maintain comparability between periods, the data for the nine months 2021 reflects the combined data as released by SLC Agrícola and Terra Santa Agro in this period. Net revenue grew 43.6% in 3Q 2022 and 59% in the nine months of 2022 compared to the same period of the previous year.
The highlight was the 41.1% increase in record soybean yield and higher prices invoiced in both periods. Adjusted EBITDA in the quarter was [BRL 277 million], up 14.3% and with a margin of 27.9%. In the nine-month period, the record BRL 2.4 billion was reached, an increase of 89.8% compared to the nine months 2021. Adjusted EBITDA margin amounted to 45.3%, up 7.4 percentage points versus the combined nine months of 2021. The increase in build prices and higher volume shift contributed to the growth in the adjusted EBITDA in both periods. Gross profit climbed to BRL 727.6 million due to higher volumes and better prices invoiced.
In the quarter, net income was negative by BRL 78.3 million due to the recognition of the variation realization of the fair value of biological assets, reflecting the drop in cotton and corn yield and the increase in expenses in the net financial result. In the nine months 2022, we reached the mark of BRL 204 million , 37.9% higher and with a net margin of 22.2%. Now, in slide 11, we discuss our cash generation during the period. Free cash generation was positive in 3Q 2022 at BRL 340 million, and we ended the period of nine months with BRL 208.7 million, reflecting the timing of the financial cycle and the end of the payment of inputs and the start of billing for the cotton and corn crop year 2021/2022. Now let's talk about the company's debt.
The company's adjusted net debt ended the third quarter of 2022 at BRL 3.095 billion, up BRL 702.4 million in relation to the closing of 2021. Net debt was impacted by greater working capital requirements related to the payment of the agricultural inputs needed for the 2021/2022 crop. It should be noted that the increase in debt during this period of the year is expected and considered normal. Thanks to the strong EBITDA in the year, the company's leverage continued to shrink. In the comparison with the end of 2021, our net debt-over-adjusted EBITDA ratio decreased from 1.42x- 1.02x in the third quarter of 2022. Stock buyback was one of the ways to allocate the company's cash generation. On slide 13, we present the total volume of shares repurchased up to now.
After completing the buyback of 2 million shares, a program that was approved on September 30, 2021 and concluded on 12 July 2022, the company approved a new share buyback program. On July 13, we disclosed via material fact, the fact that we received approval from the board for a new stock buyback program in the amount of 4 million shares. The buyback plan is in progress. The acquired shares will be held in treasury for disposal or cancellation. To date, 1,396,000 shares have been repurchased. Now I'll turn it back to Ivo who will talk about the main operating highlights and the outlook for the 2022/2023 crop year.
Okay, let's move on to slide 15 to present our estimates for the 2022/2023 crop. Our current estimate is to plant 606.
We have normal conditions for the beginning of this cycle, and we secured a good planting window with high yield potential for the crops. Rainfall in the Midwest and Northeast is looking good with a high probability of a La Niña climatic event. On slide 17, we detail the cost per hectare with an estimated increase of 20.2% compared to the previous crop year. The main factors that contributed to the increase were increase in the prices of our main input feeds, fertilizers, and pesticides, impact of inflation, increasing the effects of important variables that make up the cost, such as fuel, energy, and freight. Moving on to slide 18, we will discuss our updated hedge position. We have already purchased 100% of our demand for fertilizer and pesticide for the 2022/2023 crop year.
Additionally, we improved in the hedging of the 2022/2023 crop year, reaching higher prices compared to the 2021/2022 crop, partially offsetting the increase in agricultural inputs. We have now fixed 34% of the soybean exchange rate at BRL 5.68 and for corn is locked at BRL 6.11. It is important to know that we have to fix the hedge at the same curve. Moving on to slide 19, we take a look at our estimates for production and sales in the seed business. We estimate a sale of soybean seeds in 2023 to third parties or internal consumption of 1,120,000 bags. In corn or cotton seeds, we estimate an internal consumption of 121,000 bags of cotton seeds with a quality indicator above 90% of official germination.
Thank you very much. We will open for questions and answers. We will now start our Q&A.
We would like to ask to please ask your questions all at once and to wait for the company's answers. To ask questions, please use the Q&A button at the lower part of the screen and your names will be announced so that you can ask your question live. At this time, a request to activate your microphone and camera will appear on the screen. If you prefer not to open your microphone or camera live, please write, "No microphone camera," at the end of the question. We have a question from Gabriel Barra, Citibank. Good morning. Gabriel, you may ask your question.
Hello, Ivo and Gelain. Can you hear me? Very well. I have two questions, the first of them in relation to hedging.
We saw that hedging did not increase much in relation to the previous quarter, and if you look to the previous year, it looks as if you are not as well hedged for the three crops as last year. What I would like to know is about your prospects. Does it mean that perhaps you are more bullish in relation to commodity prices from now on, that is why you have less hedging? Second point, in relation to leverage. As you mentioned, the company has been deleveraging with a net debt of 1x EBITDA, and as you said, you also have the stock buyback program in progress. In relation to capital allocation, much has been said about new business opportunities. One of them that is already mature, which is the seed business. Another point in relation to fruits that has already been commented on in previous conference calls.
Could you please give us an overview? How are you looking at the lower leverage? How can we think of the company capital allocation strategy? Also in relation to the elections results. Now we have more clarity on the new administration and our future president. With this, there are some discussions around the prospects for this industry. So what risks and opportunities can you detect under the new administration? Could you give us a little flavor on your agenda considering the political aspects and the new government? Thank you very much.
Thank you, Gabriel. Okay, let's talk about hedging. I was looking at our hedging charts at the end of October, early November, in comparison to previous years. In fact, we are almost in line with the previous years. Possibly we will release this graph to you in the next few days.
In our hedging policy, as we buy our inputs, we also lock commodity prices. Now we have mostly 60% of our crops hedged. Looking back to the past, we see that we also have several commitments to suppliers that we need to pay off. As the payments are made, we will also make progress. I think that we are in line, especially in relation to soybean. What we see now with the La Niña, we see the south of South America being affected, but it would not be fair to consider we will have or we will suffer heavy losses. If there is a risk, it is that there is a risk of price upside because the market is pricing higher and the prices are still at $14.5 per bushel per bag. The same goes for corn.
We still have a long time or a wide window for sale of corn, and the risk is the La Niña effect. Once again, with the risk for an upside. In cotton, the scenario is a little more tense because of the crisis taking shape in Europe and the United States with the slowdown of the economy, and this makes the scenario a little more cloudy. The United States suffered heavy losses in their production, so no new production will be coming in. Our harvest will take place in Brazil only next year, and cotton is at the range of $0.80 per pound and they will not vary much, except as a result of the economic crisis while we are discussing under low unemployment and the economy is doing very well. In relation to leverage, the leverage was brought down to the levels we wanted.
When we acquired Terra Santa in the first year, we had a very important challenge, which was to bring down leverage to 104. We also had to integrate the teams, which we did successfully in 2022. For next year, we were supposed not to grow in new areas unless there was a great opportunity, but we made changes. For example, we adopted SAP. We also did the migration of the Terra Santa employees. Once again, we have a low leverage level to make a leap in terms of growth. We are growing in seeds volume, and consequently in the added value that we provide. We believe that our share price is low. That is why we started this share buyback program in relation to the very low prices, and the market has already responded to that. We believe that will continue along the same lines.
If the price of the share is too low, we will buy our shares back. In relation to land, this is something that we are going to become more active in. Now, elections. We had 14 years of the Workers' Party ruling the country, and agriculture has always been a very important factor for Brazil and what the Workers' Party is proposing in relation to zero deforestation and the end of illegal deforestation and slash and burning. We are totally in favor of eliminating these practices from our industry. We have already made this announcement. We are not going to start new areas. We will only use areas that have already been planted in the past. So our business grew in the 14 years of rule by the Workers' Party, because agriculture is such an important pillar for our growth.
We have an exceptional climate, very good land, so there is no reason whatsoever to start undermining a sector that has been so successful so far.
Thank you, Ivo. Thank you, Gelain.
Okay, let's continue now. We have a question from Thiago Duarte, BTG Pactual. You may proceed, sir.
Hello, good morning. Gelain and Ivo, always a pleasure. I would like to touch on three points. Firstly, in relation to the next crop year, in relation to the increase in average costs of around 20%. Could you please give me some details? What are the driving forces for this price or cost increase? I believe that inputs crop protection is probably the most important drivers, but what can you tell me? Can you also tell us the average price, especially of the fertilizers that are part of this increase of 20%?
Because we are trying to anticipate, as fertilizer prices go back to normal in the future, what would be the decrease in costs thinking of the 2024 crop year. The second question, based on the discussion that you had with Gabriel in relation to growth. I am aware of the potential of the seed business and you are also going into fruits, which could be very substantial in the future. Now thinking of the core business, soybean, corn and cotton, as you said, this is a year in which you did not grow your planted area because of the leased area you had. When you look at the land bank, you have around 5,000 hectares under transformation. So it was a minimal increase in relation to what you have. So we would like to know what can we expect in your main line of business.
Are there other Terra Santas or possible Xingu, other assets that you would like to acquire to reach an even higher level in planted area? Finally, the third point in relation to the quarter, could you please. We know that there are several ups and downs in this, I am talking about the contribution margin of soybean. In this quarter, the soybean contribution was a lot worse than before, and I would like to understand the reason, because the yield in soybean was excellent this year. So was it logistics? Was it the mix of agricultural production units? What was it exactly?
Thank you very much, Thiago, for your questions. About the 2022/ 2023 crop year, this increase is coming from fertilizers and crop protection. It is difficult for me to give you details on the fertilizers.
We have this information, but if I break this out to you, this creates a problem because sometimes, the prices are a little bit higher or a little bit lower depending on the supply. The same applies to crop protection. If I say or announce the prices, we will end up running a problem with our suppliers. Those are the two main drivers, as I said. The increase. In the 2021/ 2022 crop year, we had very low costs. In the comparison, we had some acquisitions being made before the outbreak of the war, and then there was a significant increase in fertilizer and crop protection products. We started in June with an average price between what we acquired before and after the war.
In comparison with last year, of course, the result was an increase of 20%, but for next year, we expect a reduction in cost because prices of both crop protection and fertilizers are shrinking. In relation to growth, I believe, yes, there are other opportunities in the magnitude of Terra Santa or Xingu. Several farms with 50,000 hectares, 80,000 hectares available and degraded pasture land that can be converted. We have several projects under analysis right now, but the fact that considering the interest rate of around 15% a year, it is a little more difficult to make the numbers really worthwhile because of the interest rate being so high. As I said, our objective this year was to have the integration of all the employees coming from Terra Santa, a reduction of leverage. We are now feeling comfortable about our EBITDA and leverage level.
All of our operations in Terra Santa are now running the same systems. This is quite a challenge, although it does not seem much, but we implemented SAP in all of the former Terra Santa units. We are now poised for new growth. For next year, we will expand our planted area. In relation to margins, soybean margins in the quarter, they were indeed lower, partly because of the farms, but because there are some ongoing expenses, for example, updates and maintenance of our machinery. When you sell low volumes of soybean, then there is an impact because the additional costs appear, especially if it is a farm whose positions are now zeroed and all of the additional costs appear. But in the year- to- date, we can see the results in soybean. The year is practically over. Then we will have a little more soybean in the fourth quarter.
There could be some minor variations in different farms, but the numbers will not deviate much and they are very good numbers for soybean indeed. Thank you.
Our next question is from Lucas, JPMorgan. You can open your microphone, sir.
Hello. Sorry, my camera is off. Two questions, in fact. November, December are key months, thinking of the soybean harvest. What do you expect, considering the climate projections and what about the yield that was very conservative before if it starts raining in line, do you think that there could be an upside for this number? Secondly, about cotton, I would like to understand a little more. You said that you expect a small surplus, but what do you expect in terms of price triggers to increase the cotton hedging?
Thank you, Lucas, for the questions.
Well, it's raining now adequately in Mato Grosso, where we'll have the second crop in this. Soybean is always insured in terms of the second crop. We had the optimal window for soybean. We'll have a very substantial harvest in January, which will support. It will be the planted area of the off-season cotton. We plant and harvest soybean in January, and in January, we plant corn to be harvested in June and July. This is the window. So far the climate has been very favorable in all regions. We're still in the beginning of the cycle, but we're feeling very optimistic. We believe that. Well, we have a La Niña forecasted, and this means not as much rain in the south region. The projection for November and December in Uruguay and [ Rio Grande] do Sul in Argentina, the climate will be drier. This is important.
It's also important that we continue to get rain in the Midwest and the Northeast. In relation to cotton, what can I tell you? Cotton prices are oscillating a great deal. We have to track this very closely because it was at $0.71. It's back at $0.80. We're monitoring this very closely. We're waiting for the approval of our budget by the board to define our objective margins for next year. Once this has been defined, we'll sell our cotton. We have to really use the favorable moments to sell cotton in the year, and it's still too early. If our policy is not to sell more than 80% before the harvest, and if we are sold by 60%, all we have is 20% of our production to sell. In eight months, this is a long time, in fact, to really get the best prices.
Obviously, we haven't planted cotton yet. We have to wait for the off-season corn planting, and then we'll see how the crops develop so that we can make progress in the selling process. It's usually to rush into selling without knowing for sure how the crop will develop. That's why today we have 60% that has already been sold. This is what we have been doing in all the years, in fact, at this time of the year, basically.
Thank you very much, Lucas. Our next question is from Guilherme Palhares, Bank of America. Good morning, Palhares. Please, you may open your microphone.
Good morning. Can you hear me? Okay, very well. First of all, I would like to congratulate the company for the results.
When we read the guidance, we see that the increase in costs per hectare, in terms of fertilizers, is actually much below what we see in the spot markets. This is very impressive. We also looked in the guidance, for example, in the processing lines for cotton in the comparison year-on-year, we see that we're now at 1.3 million. Could you please give us some more information on the drivers for that improvement? Also we saw that the company was able to secure very competitive crop protection and fertilizer costs in this crop year. Looking at the spot prices for fertilizer that we see today, could you give us a little flavor on the savings that the company obtained?
And in the guidance that was recently announced by the company, considering the amount of inputs per hectare, do you consider in the guidance, the benefits from the digitalization project with lower application of inputs next year?
Thank you very much, Palhares, for your questions. When you compare crop years, the crucial moment is the moment for acquisition of inputs, and especially with the high volatility, driven by the conflict in the Ukraine, then of course, the situation is even more crucial. I cannot say that the scenario is positive, but we see that probably for next crop year, fertilizers will have lower prices and also crop protection. This is based on the conversations we have been having with several sources.
It is difficult to make comparisons between crop years that, like a snapshot of different times because it is very important for you to be aware, because prices is always something that is defined by the yield and the average price. And what we know is that since we need high yields as producers and we have already signaled what this yield will be for the next crop. If you consider this and the prices we have already hedged in this market, you will see that you were a little below the increase in prices per hectare. So, probably margins will be a little smaller for next year, but margins for this year will be very high net margins. So a slight reduction makes all the sense in this scenario.
It is difficult to make this comparison between the spot market because we are working to close deals on fertilizers for the next crop year. And we see, for example, prices being reduced even in comparison to what we bought this year. So it is possible to make this calculation, but I am not really sure that this will add much to the analysis of the company. As for the gains we obtained with digitalization, yes, they are considered. We have targets that we included, and that will lead us to the savings that we are looking for. So we will use less fertilizer. We need lower application because we know that there is residue in the soil and with the draft and with the corn and soybean, there is fertilizer in the soil that will be used for the next crop year.
And we also use selective application of crop protection, herbicides, and fungicides. Our margins grew, in recent years because of this. The smaller players could not access these technologies because there is an entry barrier in terms of costs of acquisition and implementation. Since we started on this race sooner, we are ahead of them. They will catch up, but we are the early adopters. We will be adopting new technologies much ahead of our competitors and this will give us several advantages in efficiency and competitiveness. This increase in margins is explained especially by the higher efficiency in the application of fertilizers and crop protection in our farms.
Okay, very well.
When you look at the cost formation for the 2023 crop year, when we consider fertilizer prices, is it fair to say that what you bought in terms of fertilizer was a little below what we see in the market today?
Well, it is just like the glass half full or half empty, right? We have always used the glass half full because we know that in some years, fertilizers get more expensive and we can use the fertilizer. This is a year in which fertilizers are expensive, so we could use a little bit of the residue in the soil for that purpose. With the drought that took place in Mato Grosso and Bahia, most of our productivity is still there. The fertilizers is in the soil, so we are going to use this. This will help us reduce cost and also maintain high yields.
Because since we acquired 80% of the package and we planned for the use of 20% of the residual fertilizer, since this residual fertilizer is there because of the drought, the glass is once again half full. But only through sampling analysis can we know this for sure. But this is what we expect, that the soil will be able to deliver on what we expect.
Thank you, Palhares. Our next question is from Daniel Sasson, Itaú BBA. You can open your microphone. Hello, Daniel, Itaú BBA. You may proceed.
Hello. I am sorry. I had a technical problem. Thank you for entertaining my question. Most of the questions have already been made, and answered several important points. Could you talk about your silos? You were able to store 70% of the grains, but in the third quarter, this was down to 45%, 60% because of the increase in volume.
Is there a percentage that you consider optimal that you would like to attain? How is your silo capacity evolving? Just as a follow-up on the previous question, since now that you have integrated Terra Santa and that leverage is down to low levels once again, thinking of possible growth. Well, you commented on the end of the Guapirama lease of 7,000 hectares. Are there any leases expiring in the short term? Could we expect a change in the mix between own land and leased land?
Okay, very well. Let us start with the leasing. We have those two leasing agreements with Guapirama that would expire in this crop year. This was agreed upon. It is not a new fact. We were aware of that. Since it was a very short-term agreement, the negotiations started much before by Terra Santa.
Since we would increase the number of bags, the negotiations did not exactly progress very well, and the agreement was revoked. So in future leasing agreements of Terra Santa, we will have more bargaining power, and we will be able to bring them into our portfolio. In relation to our production capacity, well, obviously with Terra Santa being incorporated, there was a reduction because Terra Santa had less storage capacity, but working with 50% of storage for grains, we believe this is enough because it is important that the warehouses has some shortages. But because, of course, with a warehouse, you need to clean the grains that come from the fields, from leaves, and sometimes you have different qualities of soybean in your silo, and then you need to sell in the exports grade. What we have been doing is to maintain 50% of capacity.
We believe this is enough. We have the first crops, soybean, then we harvest, and in the second quarter we have the mix. This gives us a very good storage capacity. When you do not have warehouses, you can also leave the grain lying in the open. Eventually we may expand our storage capacity if needed.
Okay, Daniel? Let us continue now. We have one more question from Mr. Vitor Poli from Lazienki Corp. I will read this question. Based on the decrease in input prices for the 2023/2024 season and an increase in commodity prices, when should you start locking the prices and margins, and to what percentage could they get?
Thank you, Vitor, for this question.
Once we start closing the purchase agreements for the 2023/2024 years, and when we start buying inputs for that, we will also close the commodity prices because there is a price correlation between the two. In our hedging policy, we are deeply aware of that correlation. As we close the inputs, we close the commodities. Longer-term agreements are a little lower, for example, as in the case of cotton, but now it is slightly better. In the fourth quarter, we start buying fertilizer usually. Probably by March, we will have a more advanced hedging position for the 2023/2024 crop year.
Okay, if we have no more questions, our conference call on the third quarter of SLC Agrícola is now closed. Our IR department will be happy to answer any of your questions. Thank you very much. Have a great day to all participants.