Sao Martinho SA
BOVESPA:SMTO3
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Sao Martinho SA
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Good afternoon, ladies and gentlemen. Thank you for waiting. Welcome to Sao Martinho S.A. Conference Call to discuss the results of the First Quarter of the '22/'23 harvest.
Today with us, we have Mr. Felipe Vicchiato and his Investor Relations team. The audio and the slides of this call are being broadcast simultaneously at the company's website, which is saomartinho.com.br/investorrelations.
[Operator Instructions]
We would like to inform you that some remarks made during this call may be projections or forward-looking statements. As such, they are subject to known and unknown risks and uncertainties which may lead to such expectations not to materialize or be substantially different from those expressed in these remarks.
Now, I would like to turn the floor over to Mr. Felipe Vicchiato, who will start today's presentation. Thank you.
Good afternoon, everybody. Thank you very much for your presence in Sao Martinho's call about the first quarter of the '22-'23 crop year.
Let's start our presentation with the agenda with the main items that we would like to approach. First we will talk about the operating highlights and then the financial highlights, the cash costs, indebtedness, price evolution for sugar in the market. And then, at last, ethanol market and the impact after all the tax measures that were put in place in the last few days.
On the next page of our operating highlights, in the quarter, we crushed 7.8 million tonnes of sugarcane, 10% less year-on-year given the lower agricultural yield going to 71. And additionally, the TRS that we saw in the quarter was 6% less, 16% less quarter-on-quarter.
What impacted the lower crushing and also the TRS was an operating decision on the part of the company to start the harvest of Sao Paulo mills a little bit later because of the lower availability of sugarcane trying to get a better TRS more to the middle of the harvest. And if you compare year-on-year, you see a lower production.
And in spite of this drop, we understand that the crushing or the final crushing up to the end of the harvest year will be according to the guidance that we gave you in the last quarter, something close to 20 million tonnes of sugarcane, practically the same from the crushing viewpoint as the previous year and the dilution of fixed cost that we saw in this quarter.
Then we have the summary of the financial highlights on the next page. We sold 3.5% more in TRS equivalent when we put the same base for sugar and ethanol, given the volume of inventory. And because of that, net revenue went up by 29%, EBITDA -- adjusted EBITDA 27%, both as you can see on the slide on the lower part that you should see the prices both of sugar and ethanol went up quite a lot. And here you have 26%. Net income of the company grew 16% and the cash income goes down 4.9% because of the impact of some financial expenses of exchange reversion that were under the shareholders' equity.
And for accounting purposes, you can see that we have to carry this from the accounting viewpoint up to the date of the export. So we have about BRL 80 million. And we have a mark of swap that we did at the beginning of the year. And we decided to swap this debenture. This is a very long debenture, 12 years.
And when you transfer to the market, it goes to BRL 32 million of monetary variation. We had a very strong quarter for the payment of ethanol prices that went up over 30% in the quarter, because up to June, while the effect of the taxes will be as of the second quarter only.
Then we see the cost evolution. We have been talking about that since last quarter, impacting the cost of production and maintenance CapEx here. As you can see, effectively, this is an expense and we have an increase of TRS equivalent of about 30% of each.
We have the price of Consecana here. We have this 12.9% decreasing overtime. I will be pushing practically the same as last quarter. Here you have an increase in the 40% year-on-year. Diesel 3.4% and labor and others 1.3% with an effect on this quarter, but it's not very high. But next quarter it will tend to go up. And we believe about 12% for the year. With the increase in the unit cost, our cash cost for sugar goes up 34%, BRL 45 per tonne, as the price of sugar in this quarter went -- was a very low one.
We have a compression of the sugar margins now. And in the case of ethanol, the price is 30% more with a margin practically the same as it was last quarter.
Then we have the indebtedness of the company on the next slide, BRL 3.2 billion at the end of the quarter, a very comfortable net debt EBITDA. You can see here BRL 2.8 billion with 3 years term and the remainder will be of about 4 years. We didn't reduce the level of leverage of the company because we are in the process of investment. And because of working capital, this quarter is still high as I pay about 20% of the harvest and then you have the remainder to be paid.
We have a hedge position '22-'23, we closed with a sugar hedge of about 604,000 tonnes with an average price close to BRL 12.3, BRL 1,000 per tonne and 4,000 tonnes is the volume of sugar that will be sold in the next 3 quarters. It's not referring to this. This represents about 80% of my exposure for this year.
So we are very well covered regarding the volatility of sugar for this year as well as the dollar. For comparison purposes, this price of our own sugar in the next few quarters will be 26% higher than the price that we had last year. So there should be a reversal of the sugar margin improving in the next few quarters because of the better pricing.
In the quarter, we started to hedge the '23-'24 harvest, close to 165,000 tonnes at BRL 2,400 per tonne. And we continue to evolve. Today it's closer to 250,000 with an average price, which is similar. And we intend to continue to do this given the price dynamics of ethanol in the domestic market that should hinder pricing.
Today, in terms of mix, we can go more towards sugar, then hydrogen and hydrous. The price of sugar today is equivalent to about more than 10% with hydrous. In the first quarter, we have a lot of ethanol produced. But it has to do with the mill that we're operating faster.
We delayed 15 days the Sao Paulo mills and the Goias one started operation much earlier. So the level of production, as you can see, there is a higher production of ethanol. But it is because of this difference in terms of the beginning of the production of ethanol vis-a-vis sugar.
Then we talk about the ethanol market in the next slide and highlighting here all the tax issue that happened in the last few months. We can see here from mid-June on, we see a major reduction in the price of hydrous ethanol, 15%, when we started to talk about the tax changes up to today.
So in order of magnitude, we had the PIS and COFINS taxes here for gasoline and for ethanol. And the federal government made a decision about this tax. And as the gasoline tax was higher than the ethanol, ethanol lost competitiveness first because then it decreased the ceiling of the price of ethanol.
And after that, one important point, a decision by the SDF; it was decided to keep it for 60 months. And this is the average price of gasoline, which is the basis for taxation. And at a certain point in time, the average price of gasoline, it was even higher than the ethanol price.
So you have an additional loss of competitiveness. Then it was reverted partially because of the [indiscernible] in the last 15 days when it froze the stacks for ethanol. And the Congress approved the tax difference, both at the federal and state levels.
At the state level, it has already been implemented, federally not yet, because the PIS and COFINS is zeroed for these products. And once the federal tax goes -- well, the parity does not exist yet. And lastly we have a presumed credit for the state of Sao Paulo. It is reaching a final draft. But both, Goias and Sao Paulo in August to December, there will be a credit at the state level.
If you look at what happened to the market, you can see an overall drop of 15% in the price. We expect this not to go up at least until December when the federal tax will be maintained up to when the federal tax will be maintained zero and the demand for hydrous ethanol is quite low now. Consumption of gasoline is very high and hydrous ethanol is lower. We see consumers consume more gasoline, given the speed by which the prices went down. And we will be producing sugar and hydrous and because of this demand situation for hydrous.
Well, these were my remarks about our results and the market for sugar and ethanol.
And now, I would like to open for the Q&A session, please.
[Operator Instructions] Our first question is from Isabella Simonato from America.
Felipe, the volume of ethanol that you were able to export this quarter really draws attention. And I would like you to get into details about your strategy and how do you see the mix from now on? What kind of price opportunities you can see for this kind of market? And my second question, you mentioned a mix more towards sugar because of the price difference. How do you see the industry in the center south for the remainder of the crop year, so that we may better understand the supply-demand scenario? And lastly, there was a cost component that was affected by the delay in the harvest. So how do you see cash cost from now on?
Isabella, thank you for the questions. In relation to ethanol exports, there is a major demand for in hydrous ethanol at the European market. There will be some also in the second quarter.
And this ethanol as we have shown in our income statement, we sold a little bit higher than the local market. It was about BRL 4,000 per cubic meter. And you have all the details about that in our financial statement. And we expect this to be maintained in the next few quarters. And our idea is to do something close to 150,000 cubic meters of export. And this removes part of the pressure on the domestic market because the demand for hydrous is quite low here, consumers preferring gasoline because of the circumstances.
Regarding the production mix, we understand that all the mills are going more towards sugar. But there is a limitation in terms of raw material in this sector. Probably the current harvest will be equal to the last one in the best hypothesis. And you can see the numbers of UNICA regarding the production of sugar and ethanol. So production of sugar shouldn't be much higher than in the last harvest, but because of profitability, everybody going more towards sugar.
And lastly, regarding cash cost, we had this impact. So that in the first quarter, we -- well, as you know, there is an impact on the unit cost. But at the end of the day, what we estimate here is that year-on-year, we will see an increase of about 10% to 15% more cash cost because of the inflationary impact, diesel going up 60% and the diesel that I bought in the last harvest, I bought when the oil prices were quite low.
So diesel was cheap. And I was able to sell a more expensive ethanol. So we focused on ethanol because of that. And now, we are paying more for diesel. And we are selling up to June a cheaper ethanol and up cheaper and then after June, more expensive because of the tax reasons that I have already referred to.
So the impact of fertilizer is 72% for instance, this is common for the sugar and the alcohol industry. And it has an important impact on our cost. And we try to be as efficient as we can in the harvest, harvesting more sugarcane per harvester and later the yield. I believe it will be 73, 74 TCH at the end of the year in order of magnitude 10% to 15% more vis-a-vis the full year last year.
Gabriel Barra, Citibank.
I have 2 questions, Felipe. The first one has to do with a very complicated situation in the past. I would like to know how you see from now on, I understand you will have a recovery of TRS for the next few quarters, reinforcing the guidance and there -- but looking at the medium and the long run, how can we see the productivity impacting the next few cycles?
What could we expect about the higher CapEx for the innovation of the plantations in order to guarantee yield increase? Or do you have a more conservative view because of prices? This is the first point.
And the second point, it has to do with the corn ethanol. What was the impact in terms of return of profitability for the project? We have been seeing some players looking at this kind of project or corn ethanol, even in regions that were not very convenient for this kind of crop such as Sao Paulo.
What could we expect from you that is to say, do you intend to go with Sao Paulo and not only Goias for the corn ethanol production?
Thank you for the questions. Let's talk about productivity or yield first. The yield this year is impacted basically because of the dry climate that we had last year and a very dry summer mainly.
We came from a very bad phase from the viewpoint of weather. And from April to November for the full harvest in 2021 and with a very bad summer from November to March in terms of rainfall. And the result of this combination is this drop in the TCH.
And for the next year-end, for the long run, as we are improving the overall production of the 18-month sugarcane, more resilient, more productive, we expect summer to be -- let's say this is a normal summer with abundant rainfall.
We will be able to recover this yield. Just to give you a figure in 2018, if I'm not mistaken, we had a very complicated; it was 64-65 TCH. And in '18-'19, in '19, I was close to 82-83 already.
So the recovery is very good if you have the necessary rainfall. If rainfall does not come at normal levels and we continue to have a dry summer, then, the yield will be impacted for next year as well. And then it will be dropping from 73 down, because if you have 2 years of a dry summer, it could lead us to an even worse situation.
Apparently, what we have in terms of forecast, we will have a normal summer rainfall wise, but it's too early to say. We are still in August. But apparently, the summer will be normal in terms of rain. But we need a longer time to talk about yield for next year.
Regarding your other question, we are not going to accelerate the renovation. When you accelerate renovation, you will have a very high CapEx and you end up losing 1 year of harvest, if you do that. So it is not worthwhile. So we do not intend to increase the renovation rate.
We are decreasing the purchase of agricultural machinery. They more than doubled in price. So we are doing the math in order to have our correct check and ballots. And this is another point. The prices of agricultural machinery, in some cases, more than double the price.
So we need to extend the useful life of the current equipment by means of maintenance, et cetera, that would be a better option now than buying the new ones. And lastly, the return of the corn plant, the corn mill -- if we imagine that the price of ethanol will remain where it is now, PIS and COFINS not coming back in the short run.
And there are some talks going on about this, and PIS and COFINS might continue to be 0 in 2023. And supposing the price, well, the return, we were talking about 25% return.
And this would go down to about 17%. It would still be okay, but it would be very close to our limit. The cost of capital is 16%, 17%. But we had talked about 2 assumptions. First, that corn will always be BRL 70, which is highly unlikely, because at this price, producers will have no incentives to produce more corn.
And the PIS and COFINS remaining for the long run, is also unlikely. It's important to remind you that the PC of the fuel was approved now. And we believe that at some point in time, this will prevail.
Daniel Sasson, Itau, BBA.
Thank you for the questions and for the presentation. My first question has to do with the corn mill. Could you talk about the timeline and the construction of the plant, whether there is some change in the expected CapEx because of the cost inflation and if your startup will continue to be the same or will be postponed?
And regarding the other expansion project during the last conference call, you talked about the decision to invest or not in biogas -- that, you could be resuming by the end of this year. So have you made any stride in terms of the feasibility study that you were carrying on?
Daniel, thank you for the questions. In relation to the corn ethanol plant, there has been no increase in the CapEx after the last material information that we sent to the market.
And initially, it was BRL 650 million of investments. And then, we published 90 -- plus BRL 90 million going to BRL 740 million. This was the material information that we published and this will be final.
We already have the storage ready. It is according to schedule. It should be ready to be started up in October, November. With the commissioning before and full operation with daily production more around the mid-January, but the schedule continues to be the same, no change.
Overall, if we need to delay a little bit, there will be no problem whatsoever, because selling ethanol in this period up to December, given the PIS and COFINS situation, we believe that we would be selling at a lower price or even than the cost.
So the idea would be to do this at from the beginning of the next year from January. But we are on time. We are on schedule and we are on budget. The biogas expansion, we expect to have a decision to reach a decision by the end of the year. We have already worked on that quite a lot in the last few months.
And together with the same -- the main players or technology players, we should be announcing something closer to the end of the year. As I said before, our cost of capital is around 16%, which means that we need to be safe in terms of CapEx. And we have to detail this regarding investment and with the price of gas that may remunerate in an aggregate fashion.
This is not a small investment. We are talking about BRL 140 million, BRL 150 million, so we have to make an in-depth analysis to be able to make a decision. But we should reach the decision by the end of the year, whether we will continue or not.
Lucas Ferreira, JPMorgan.
Felipe, about the federal taxes coming back or not and reinforcing the carryover strategy for the period between harvests.
But you said that you're still discussing this. So my question is the following. What about your inventory -- ethanol inventory? Will you try to reinforce your strategy or carryover strategy for next year?
And the next question is about CapEx. You are going to make a decision about the expansion. But let's say you decide to wait a little bit more. What about the capital allocation, dividends, et cetera and the corporate sugar situation.
What could we imagine in terms of your leverage target and how much you could return to your shareholders? And I wish you a lot of luck and thank you for all these years.
Well, as you have touched upon the subject today, the last day after 12 years, they decided to leave me. But okay, and jokes apart, I thank you very much for all the work that she has done for Sao Martinho.
And let me get to your points. In terms of ethanol, the presumed credit that the federal government gave to the states. It makes state transferred to the mills from the sales that occurred between August and December.
The amount is between BRL 0.15 to BRL 0.20 Lucas. So the decision to sell hydrous ethanol, I'm talking about hydrous, okay. The decision to sell hydrous between August and December, we have to do the math. And we have to include the presumed credit in the decision.
I don't believe all the mills will be holding back the ethanol inventories to sell as of January, because there is this question mark regarding PIS and COFINS. And there is the benefit from August to December vis-a-vis the presumed credit.
In our case, we are still evaluating this and the large volume of hydrous I have is in Goias, not in Sao Paulo. In Goias, we have already sold quite a lot in the first quarter. So we are still evaluating when will be the right moment to sell. And it has to do with the market price and the presumed credit and the sell, of course.
And the capital allocation for the next year, the corn ethanol plant in the second phase will be -- for the next year, when things are more -- clear, the PIS and COFINS situation, what will be the price of oil and all this will make a difference. Maybe it will not be $60, maybe it'll be $65, the oil price.
And it would change the return on the project. And there is another point which is very important. In the previous answer when I mentioned that the return of the corn ethanol project would be around 15% in the worst-case scenario. There is an assumption in the process that I'm not going to sell synergy at spot price, let's say, 150 per megawatt hour.
Let's say this -- let's say my cost of opportunity is lower than that the return of the project will improve. Why am I saying this? Boa Vista, in 2025 will be ending the long-term contract of when I started the project way back then. So I will have a very large volume at Boa Vista to sell at the spot price and contracted for a few years, depending on the price of the synergy.
It may be more feasible to use the synergy then sell it at a lower spot price. These things are interconnected. And at the right point in time, we will be making our decision, capital allocation. Biogas, for instance, we intend to leverage this product. The value that will be placed by the shareholder will be less than 100%. And we'll continue with the dividend and return on equity payout.
And if the share price stabilizes, we will go back to the share buyback project.
Luiz Carvalho, UBS.
Let's talk about capital allocation in the current scenario of financial expenses. We see a more stringent cash situation. Looking ahead your capital allocation project, I would like to know your opinion about that.
And what about your strategy, are you going to hold on to your inventories? You have been using this strategy; you make a comparison between ethanol and sugar on your slide, by BRL 90. We saw very high volatility.
I would like to understand your strategy to sell your certificates. The interpreter apologizes the sound was very bad.
In terms of capital allocation and a more stringent scenario still within this year, we should have an EBITDA more or less in line with what it was last year, supposing the prices and the costs remaining where they are.
The financial expenses basically go up because of the interest to be paid and the financial expenses of the quarter. There are many items that are not recurrent and some have no cash impact, about BRL 120 million have to do with the mark-to-market of derivatives and the exchange variation that I paid in the past, but was in the hedge accounting with from the accounting viewpoint, it is posted now.
So we believe that BRL 350 million in financial expenses supposing the interest rates remain as they are. And in spite of all that, with lower ethanol prices, we still have a very good cash generation because of the Copersucar credit that should come still before the end of the year.
Our doubt is about next year. Next year, we see a major expansion in the sale of ethanol, 220,000 cubic meters of ethanol at Boa Vista. And the second doubt is yield, if we have normal quote-unquote, rainfall, and we may bounce back to historical levels of yield. We decrease the cost and we go back to a higher level of competitiveness.
But it will depend on the rainfall. 9 months ago, if you compare to today, the scenario is worse, basically because of ethanol prices. I'm not talking about cost here because the cost was deteriorated for everybody. And if oil goes back to normal prices, we might be able to recover part of that.
And regarding your sales strategy, your second question, as we said before, we are exporting ethanol because the demand in the domestic market is still low and because consumers' are preferring gasoline and ethanol for Europe, it's much better because the prices are better and the demand is higher.
So we still have some to do 150,000 cubic meters to Europe in the second quarter more or less. And here, the sales of ethanol, we have to make a decision about selling as of January because we'll have the presumed credit to be received by the government and CBIO had a very big volatility because of the changes of Renovabio and Congress approving items to remove the mandatory acquisition, it oscillated quite a lot. It went down to less than BRL 100, for instance.
And when we have CBIOs available, we will be selling like we are selling now. We sold our inventory and it helped a lot in terms of the company margin. And we intend to continue. I don't know. Have I missed something?
No, very clear.
Leonardo Alencar, XP.
I have a few follow-ups. You talked about agricultural yield. The third quarter, it started a little bit weaker. But you said that the guidance will continue for the full year.
Could you talk about the short run the yield for the next 2 quarters and maybe giving us a seasonal reading, so to say? And you talked about sugar, that in the next quarter, we could expect an accelerator of your hedge because of the strategy that you described.
But as the average yield of the sector might be lower, don't you believe that others would have less availability of sugar to hedge? And when you talk about COGS, 10%, what is the assumption on the fertilizer side, which is a variable that may bring a lot of clarification?
Thank you very much for the questions. In relation to productivity and the guidance, in the third quarter, we harvested sugar. We harvested sugarcane that was affected by the frost that we had last year.
We made the decision to harvest this sugarcane early in order to protect it in order to treat it. Should there be another frost this year? What did we do instead of waiting for the sugarcane and harvested in August. And there could be the risk of having another frost; we decided to bring this forward.
And this is the reason why we had a; sugarcane with the low TCH. When you harvest a; sugarcane that had -- was under frost, the TCH will be much lower because it stops growing. And the sugarcane will have just a few months, a couple of months to continue growing until the harvest.
And in the first quarter, we had to do this. It has to do with agriculture strategy of harvesting or having an earlier harvesting of the sugarcanes in order to avoid it to be exposed to another frost, because this is where you have a problem.
Generally, when you have a frost in the region in lower parts of the region, they suffer a lot. When you have a few days of lower temperatures, such as was the case, we have already talked about that.
And today, we have no doubt about this. Today, it's already August 10, for instance, and the risk of frost is water under the bridge. So this is the reason why we say that we will be reaching the guidance.
Growing 10% to 15% means 40% at least. We're talking about fertilizers now. And the fertilizers that we buy are for the crop treatment and we're buying fertilizers during the harvest. Even if the prices go down, this number, 10% should not change a lot, especially for this year.
It could change, for instance, if diesel drops. But fertilizers, we have already bought almost everything that we need and about hedge, yes. From the hedge viewpoint, what we see is that some mills -- some mills are trying to remove contract because they do not have the necessary production.
And this is not the Sao Martinho case. We do not need to do that. Looking at this year, for most mills, we have already hedged. And for the next year, many people are evolving with a speed similar to Sao Martinho.
For the next few months, we expect, let's say, in September, we expect to have about half of the net harvest locked. This does not mean that the sugar price will not go up. We have a growing demand. The point here has to do with risk management.
Sugar is a product that I have liquidity. And I can sell it together with the dollar, NDF. And sugar will represent about 30%, 35% of the total. So having the total TRS locked at a good level, we understand it is very prudent in a more volatile scenario.
Thiago Duarte, BTG Pactual.
I think another point we should still discuss has to do with your reading. When you talk about recovery yield as of next year, you said, well, if we have a normal summer, it's a little bit too early to say anything about that, as you said yourself.
We will be able to recover yield and bring this back to historical levels. I would like to confirm this because I would like you to confirm that.
I think it was in 2018. Of course, the company is dealing with hydric stress for a long time, I think, since 2018, if I'm not mistaken. So in normal conditions, normal rainfall conditions, could we see a recovery already next year for historical levels of TCH or the hydric stress would continue to the sugarcane fields can recover totally?
Thank you for the question, Thiago. Yes, it's totally feasible. Next year, we could be crushing 22 million tonnes, a difference of 10% vis-a-vis what we are doing now.
Our agricultural practices, our management is better than it was 4 to 5 years ago. So this is the minimum that could be expected. And talking with the agricultural team of our company, what they say is that you treat the land.
And if it received the necessary rainfall as of November, January, February, the sugarcane will recover. What is really bringing us down is the Santa Cruz mill with 65 TCH because the soil is poor, it's sandy.
And when you have a sandy soil and you have a dry summer for 2 consecutive years, the yield becomes very low, but at Sao Martinho suffering as well. It's around 65 TCH. But should the rain come, we'll be recovering and growing 10%. From '18 to '19, we grew almost that in terms of yield year-on-year and the sector grew about 4%.
Sao Martinho is suffering and all the other mills that are located in the same region are suffering as well. But Sao Martinho plus Santa Cruz together, the response for BRL 10 million of BRL 20 million, these were the areas that were very impacted for weather -- by weather conditions.
If you look at the map, you can see that it's very bad. But having said that, we could recover and go back to 22 million tonnes and maybe reach 24 million tonnes, 25 million tonnes as we have in our business plan.
Christian Audi, Santander.
I have a question about hydrous ethanol exports in your guidance. Could you quantify this, the export volume of hydrous for this year?
We are already doing it. We have already done this quarter. You can see this in our release. And we will have the same in the next quarter. So there is nothing additional.
We are talking about the current harvest and we are already doing that. We're not talking about next year.
Would you like a follow-up on your question, Mr. Christian?
Thank you. No, I'm satisfied. Thank you.
As there are no more questions, I would like to give the floor back to Mr. Felipe Vicchiato for his closing remarks.
Thank you very much for your presence in the call. Good afternoon and we remain at your disposal should you have any doubts. Thank you very much.
Sao Martinho's conference call has come to an end. Thank you very much for participating and wish you all a very good afternoon. Thank you.