Sao Martinho SA
BOVESPA:SMTO3
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Sao Martinho SA
Earnings Call Analysis
Q1-2025 Analysis
Sao Martinho SA
Sao Martinho reported a robust increase in sugarcane crushing during the recent quarter, achieving a remarkable 16% growth year-over-year. This performance translated into a significant boost in Total Recoverable Sugar (TRS), which improved by 21.2%, indicating greater efficiency in sugar production. In the corn segment, the company saw a 19% rise in processing volume, pointing to a favorable operational environment. The yield per hectare reached approximately 91.7 tonnes, demonstrating strong agricultural productivity.
Financial results were equally impressive, with a net revenue increase of 22%, amounting to BRL 1.6 billion. This revenue growth was primarily driven by a 13% increase in sugar prices and a 5% rise in sugar volume. While ethanol prices did face a drop of 17% compared to the same quarter last year, the normalization of the crop season allowed for solid volumes in the market, which contributed positively to overall revenues. The company sold 32 million tonnes of Distillers Dried Grains with Solubles (DDGS), a 23% increase over the previous year.
Adjusted EBITDA rose by 20%, showcasing profitability despite challenges. However, EBIT saw a decline of 42%, influenced by the dilution of fixed costs and the timing of sales volumes. Cash margins for sugar sales improved significantly, growing nearly 10 percentage points to reach 25%, while ethanol margins showed deterioration due to operational cost pressures. This reflects the dual nature of the earnings report, where rising revenues masked underlying cost challenges.
Looking ahead, Sao Martinho anticipates the corn price to stabilize around BRL 51 per bag in the coming quarters. The company also expects to achieve EBITDA between BRL 250 million to BRL 300 million from corn ethanol for the full year, providing a more optimistic outlook despite the muted start in Q1. Additionally, a significant portion of production, approximately 90%, is already hedged, minimizing risks associated with price volatility.
The company is cautious of the weather's impact on production. An extended period of drought is expected to dampen sugar production levels in the last third of the season, potentially affecting pricing dynamics. Current forward sugar prices are envisioned to be around BRL 1,850 to BRL 1,860, with expectations that prices could increase by up to 20% if conditions worsen.
Sao Martinho's strategy appears to pivot towards increasing its ethanol production and utilizing a favorable sales mix. The company sold a significant quantity of hydrous ethanol and achieved better margins compared to previous periods. Their approach includes expanding ethanol contracts and increasing export volumes, targeting a recovery in price parity dynamics as market conditions shift.
The company is contemplating its capital allocation strategy, with potential expansions in both corn and sugarcane production, depending on market conditions. The development of a biogas plant is in progress, expected to ramp up next year, signaling their commitment to diversifying and optimizing energy resources. However, significant long-term investments in sugar production remain contingent upon improved market conditions.
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[Audio Gap]
To discuss the results for the first quarter of the '24/'25 crop year. With us today are Mr. Felipe Vicchiato, CFO and Investor Relations Officer; Alessandro Soares, Head of New Business and IR; and John, IR Expert at Sao Martinho.
The audio and slides of this conference call are being broadcast simultaneously over the Internet at www. saomartinho.com.br/ri. Participants will be able to choose which language they want to view the presentation in. Two tabs will appear at the top of the screen with the options. Please note that all participants will be on listen-only mode during the company's presentation. We will then begin the Q&A session for investors and analysts when further instructions will be provided.
Please be advised that certain information contained in this conference call may contain forward-looking statements. Such information is subject to known and unknown risks and uncertainties that may cause such expectations not to be realized or to differ materially from what was anticipated.
Now I would like to turn the floor over to Mr. Felipe Vicchiato, who will initiate this conference call. Thank you.
Good afternoon, everyone, and thank you for joining us today in the first quarter results for the '24/'25 crop season.
I will start with the topics of this presentation, starting with production of the quarter, the financial highlights, margins in terms of cash costs and sale price. And we will also talk about our corn operation and profitability and then hedging and ethanol pricing expectations. Crushing, our crushing was quite strong until the end of June. We produced 21% more of TRS, sugarcane alone. We were up 16% in terms of crushing. 81.7 (sic) [ 91.7 ] tonnes per hectare, which was a very strong yield. Average TRS was up 21.2%, which means that this represents 20% more for sugarcane.
In terms of corn, we processed 19% more when compared to the previous period. The previous period was contaminated by the beginning of the plant, meaning that there was a relative worsening when compared to last year. And then we hope that since the plant is already operating approximately 1,500 tonnes a day, we will get close to our guidance, which is close to 15,000 tonnes of cane and processed corn.
Our mix was also favorable for sugar production, giving sugar prices, which are, on average, much higher than ethanol prices. We produced 26% on top of the previous year, which was 15,000 to 20,000 tonnes. We hope to get by the end of the year with 1,000,560 tonnes of corn, and this should happen by the end of October. Ethanol production was up 17%, mostly led by corn-based ethanol, which had a very strong year. Cogeneration, 34%, mostly due to the beginning of cogeneration of Sao Martinho's new boiler. And then DDGS was up by 24%, mostly attributed to corn crushing. We have a mix of sugarcane, 49% and 51%. This mix should be within our guidance estimate by the end of the year.
Now moving to the financial highlights. Our net revenue was up by 22%, achieving BRL 1.6 billion. Basically, this is a combination of higher prices of sugar and higher volumes of ethanol. Sugar prices was 13% higher year-on-year. This was the result of better prices. And the sugar volume was 5% higher, and this is within the shipment schedule for the next coming quarters. In the case of ethanol, there was a 17% drop on the average ethanol prices when we compare to the first quarter of last year. I would like to remind you that the first quarter of last year had heavy rainfalls in the Center-South of the country. The crop season started performing quite well. We had good volume of ethanol in the market. So the prices in the first quarter was the highest price of last season, but it was not high enough to be sold. And this year, as the season is normalized, we were able to sell a bit more, but at lower prices when compared to last year. But even then, prices were much better than the last quarter, which we reported in the mid of June. DDG, we sold 32 million tonnes, 23% more than last year, mainly due to the highest crushing of corn at the average price, which was 2.2% lower when compared to last year.
With that, our EBITDA is up by 20% -- adjusted EBITDA. EBIT is down by 42%. EBIT, in terms of sales volume, also contemplates dilution of fixed cost, which improves our cash cost of EBIT. And EBIT is growing at approximately 18%. There were 2 important effects this quarter, which impacted the cash income and the net income of the company. The first impact was the financial result with mark-to-market of swaps that there was a change in the inflation indicator to CDI, and the impact was BRL 3.2 million in the quarter, and these swaps are very long swaps. They mature in 2033, '34 and '34. These are the ventures that we mentioned last year. And when the curve opened too much, the mark-to-market of that becomes more relevant.
If you look at the same period of last year or last season, the effect was quite the opposite. Instead of [ BRL 24 million ], there was a gain of about BRL 100 million with that swap. That's why in the variation, we have BRL 200 million when we make -- when we compare quarter-on-quarter. In addition, last quarter, there was a mark-to-market of biologic actives. That was positive. At the time, sugar prices were much higher. So our biologic active gave us that noncash revenue. And when you compare this to that BRL 21 million, there was a drop of 85%, which certainly impacts the income -- the net income of the company. But proportionally speaking, there was a significant improvement in the quarter. And if you notice in the third and fourth slides, there has not been any relevant contribution from EBIT and EBITDA for corn because this contribution will appear more clearly in the next quarter once I show you our corn inventories and the volumes of DDGs.
Moving to cash cost. Sugar cash costs remained flat quarter-on-quarter. We exclude the Consecana effect, and excluding that, it should have been going even lower with higher prices. There was a margin gain of almost 10 percentage points, reaching 25% of cash margin for sugar sales. And in terms of ethanol, there was a drop in ethanol cash cost. Part of it comes from Consecana prices and the other part relates to the lower fixed cost. And ethanol prices were down in the period. And because of that, our basis was down by 1.4 percentage points. The expectation, 4.3 percentage points, meaning in this cash cost, except for Consecana prices, the price should remain pretty much where it is going forward. But prices however, will be much better. In the second quarter, there was an important operation, important change in ethanol prices. And because of that, quarter-on-quarter, we will keep gaining margins with ethanol.
One important observation is that in the quarter, we had a large sale of hydrous ethanol, which has a better margin. And there was also some hydrous Goias. In the next quarters, my sales mix will improve. I'll have more export ethanol and contracts already concluded, and more hydrous ethanol and higher volume from Goias. And because of prices, it is higher. We sold and produced Sao Paulo hydrous, this quarter. And despite the plants are 100% anhydrous, that happened because of ICMS use. We had a large amount to use. So in terms of cash conversion and margin of cash, this number is even higher because we are decreasing our -- the working capital that is part of my asset.
Now speaking a little about the corn operation. So we crushed 124,000 tonnes in line with the guidance. This quarter, in our result, we have a corn price at BRL 62 per bag. I'd like to remind you that in the end of March, we had an inventory of 143,000 tonnes of corn. And for the intercrop period, it started in mid-June. So we had this inventory volume to handle the first months and this volume of inventory was built at an average cost that was higher. And that is why the EBIT and EBITDA margin for corn are very low. When we look at the corn inventory level, we currently have plus the future delivery support with deliveries.
In the coming quarters, we should have a corn price at BRL 51 a bag, which combined with the volume of DDGS that I will be selling in the coming quarters. In this Q1, the volume was very low compared to the total volume. But I should be moving towards an EBIT and EBITDA of corn ethanol between BRL 250 million to BRL 300 million for the full year. Just to say that Q1 is not a reference quarter for you to have forecasts for corn EBITDA because there was this very low DDGS volume that was very low and the corn inventory that was purchased at a higher price so that we could get a startup of the crop year.
Moving on, [ I will note a ] bit about our hedging position in the end of June. We had 729,000 tonnes hedged at BRL 2,000 -- around BRL 2,000 per tonne, an important part in BRL, another part, open. The dollar part only was hedged for the sugar. And this represents 76% of my own cane of what I will be billing in the next 3 quarters. We have a turnover volume of our own cane that represents 76% already hedged. If we consider the whole crop year, including the volume that I already sold in Q1, this number would get close to 90% of our own cane. For the '24 -- the '25/'26 harvest, we started our risk management policy. Although we are constructive regarding sugar price, the forward sugar price, we sold a part of it in order to get some hedging. And this accounts for 16% of our own cane.
We still believe that the Midwest and south of Brazil should have a shortage of cane in the last 1/3 of the season because we had a dry summer. And during the whole year, to date, very little rainfall. So starting September, we should see a substantial decrease in the TCH of the sector, which should impact the volume of sugar produced. And we think that this should affect the prices of sugar, but with what we are going to deliver in 2025 and subsequent crop years.
With that, we end the presentation, and we are going to open the floor for questions. Thank you very much.
[Operator Instructions] Our first question comes from Pedro Fonseca with XP Investimentos.
My first question is about the weather. I'd like to know from you this recent worsening of TCH due to a dryer weather can impact the planting for the 2025, '26 crop year? Do you have any expectation regarding that? And my second question is about the CapEx for sugar in the market. What have you been seeing regarding CapEx in new sugar producing mills? And if you see this as a potential risk for 2026? These are my questions.
Thank you, Pedro, for the questions. Well, in the case of Sao Martinho, the bulk of our planting almost all of our cane is an 18-month cane. So we plant the sugarcane between January and March. So the impact of the rainfall is very reduced because this is a period that mostly is rainy. So we plant between January and March, but those have 12-month sugarcane, a good part of the industry, those are being impacted because they're planting the sugarcane, and they find it, they run into some issues.
Regarding the volume of investments in crystallization, sugar, ethanol mix, I believe that all of the projects in the pipeline have been announced and are running in this crop year. I don't see today any incentives to invest in the sugar mix because the price sugars are lowered compared to the 2023, '24 when all of these investments were contracted. And secondly, the ethanol price recovered a lot. We had a big surprise with ethanol. It was below the parity for many, many months, and this helped us make a decision to have sugar crystallization of many companies, Sao Martinho included. But now with a premium of about 20%, 25%, it is very hard to find an investment that would offset that. So I guess that what we have now 40, 42 million tonnes, that's where the sugar production level will remain.
Super clear.
Our next question from Lucas Ferreira from JPMorgan.
I think he's off. Okay. Let's jump to the next question. Lucas, are you there? Okay. Go ahead.
I'm sorry, I was on mute. Felipe. My question is whether you think that the weather situation could even bring about some downside for crushing because the cane is dryer, it's got more fibers. So maybe part of this cane will be crushed next year so that you would wait a little bit longer for it to develop further? And my second question is about sugar. In your opinion, you talked about hedging strategy that you want to be more constructive going forward. But let's say, if you look at a sudden death of the crop in September, if looking forward, this could be a trigger for sugar, do you think that this may bring about a negative effect when you look at the appreciation of the currency? And what do you think is necessary for sugar to perform better?
Well, thank you for your questions. Well, our estimate of crushing in the Center-South region, it's an estimate that looks at the sugarcane field in general for the entire industry. Our number is very similar to the numbers from Datagro between 500,000 and 600,000 tonnes. And it wouldn't go any beyond that number precisely for the reasons that you mentioned. But there is yet another factor, which is I think the technical number is [indiscernible] in the sugarcane because at the end of the day, the amount of converted sugar through crushing is lower than it should be, given an X number of -- X capacity of crystallization. So you produce less sugar and more ethanol. So not only you have a limited number of sugarcane, the issue of the can itself is leading sugar yield to be lower than what was estimated.
UNICA published its numbers today. And so this fortnight is such that predominantly should produce a lot of sugar because the TRS is quite high. I mean it's cold. So you concentrate TRS. And statistically, if you look at it, these TRS/the quantity of tonne of sugar per crop is low due to the factors that you mentioned. So today, that things are at market price, sugar market price. This does not contemplate, does not indicate that Brazil will produce 40 million tonnes in the Mid-South. And even that this season will continue to post low growth and a price at BRL 0.17. The way it is, even with the price of cane at [ BRL 5.50 ], a lot of companies are operating very close to their cash cost.
The second question about sugar. I think the exchange rate has a technical effect. The sugar market is very net, is very liquid. There are too many traders operating there. And in case of the sudden death of the season, once they realize in the last 1/3 of the season, a lot of the cane will not even be harvested. We will have to wait for the following year while it grows. So when that happens and in fact, the numbers emerge, maybe this could be a trigger that will lead to the recovery of sugar prices. I mean we are close. Today is August 13. So I think in the next 30 to 40 days, we should have a good idea of what the effect will be.
Next question from Luiz Carvalho with UBS.
Congratulations on your results. I have 2 questions. The first question is more related to capital allocation. What is your view about the potential expansion of the corn plant and eventually the sugar plant or even if you think about accelerating the buyback or change the dividend policy? I just want to understand what's in your mind and whether there is room for additional biogas plants, if you look towards the midterm. And my second question is on sugar prices. What do you anticipate for the end of the year in order to maintain part of the hedging still open? If you could share your views, that would be helpful.
Luiz, thank you for your questions. I will start with the last question on sugar prices. We have outstanding, about 10% of the total crop or 25% of the remaining own cane with a very significant concentration in the March screen. The March screen of '25 is about [ BRL 1,850 or BRL 1,860 ]. We believe that once the TCH data and the cane sudden death that we believe could take place, this price could go as high as BRL 0.20. So this is our expectation for March. But once that screen goes up, I think this also impacts the following screens.
As for capital allocation, you talked about biomethane. We are in the middle of the construction of the plant that should ramp up next year. And while that doesn't happen, I mean, we just look at the operation to see what additional yield we can gain or what additional production we can gain and/or whether maybe we would have to make some adjustments in terms of the nutrition of the plant because in our project, we contemplate biodigestion of vinasse that removed some of the nutrition elements that will go into the sugar field. So once you -- if we -- during that project, we see that there is no need for that, the other projects that will come -- become more profitable. And that's why it will be to our interest to expedite that. But for now, I mean in terms of the buyback, we made important progress. I think 80% is already concluded. In the next few months, we will conclude the remaining portion and decide whether we will open a new buyback considering the current price of the shares.
And corn expansion or sugarcane plant? Well, this has been a very, very good year for our ethanol plant. Energy consumption is quite low with very low steam consumption. We have a very important competitive advantage, therefore, because we do not need to originate biomass. To give you an idea, in Goias, in some regions, the chip price gets to 500 barrels per tonne in a plant like Boa Vista, if it weren't integrated, it would need almost 200,000 tonnes of chips. So we are analyzing the facts to see if we can double the plant without the need to use wooden chips for anything. If the ethanol landscape remains good or constructive for this year and next year, maybe we make a decision to build a plant, but this decision will only be made by the end of the year and early next year.
But as for the sugarcane plant, it will be at Boa Vista farm. The problem is that with the sugarcane plant, that requires a significant investment. So -- and then you no longer produce -- you don't produce ethanol, but you favor the production of sugarcane and prices are quite tight. So if sugar prices, for some reason, never recover and by that, I mean an increase of at least 20% from the current numbers. So I think it will be very difficult for any project to pay off given the current situation at Boa Vista. Because when you build a sugar plant in Boa Vista, you lose ethanol, you lose yeast. We have a very modern yeast plant that we sell. So if I produce less vinasse, I cannot produce enough yeast and ethanol up to 2032, we have a benefit, an additional benefit that we wouldn't have with sugar. In terms of capital allocation, therefore, what could be more logical would be to expand our corn production.
Perfect.
Next question is from Bruno Tomazetto with Itau BBA. I guess his microphone is muted. But we'll move on. Question from Mr. Pedro Gama with Citi.
I have a question regarding sales of ethanol. It seems that the market was reacting well to a tighter balance between supply and demand. Additionally, Petrobras increased the prices of gasoline. So I'd like to understand, what do you expect regarding the parity dynamics? Does it make sense to see parity increasing and prices increasing as well? And what could be the sales dynamic for this crop year? Should we expect a lower inventory level than the previous crop year? And additionally, regarding the sugar market. I'd like to hear what you're thinking about the Indian market. How do you see the country achieving the goals of E20?
Thank you for my -- for the questions. Well, today, the parity is 66%, if I'm not mistaken, with the volume of the last month, month of July, which was almost 3 billion liters of ethanol sold, 1.8 billion of hydrous ethanol. And we think that this parity over the coming months should get very close to the economic parity, which is close to 70%, 7-0. Our sales should be more gradual in the coming quarters. It should be 20%, 25% to 30% per quarter. We don't expect to carry too much ethanol until the end of the crop season, as we did last year.
Regarding the level of inventory, I think I commented on that. And you asked about the price of sugar. Could you please repeat the questions about sugar? Because I'm not sure I got that.
My question is, what are you seeing for the Indian market, if we -- if you will achieve the ethanol targets?
Well, for the Indian market, these are goals. It's not our mandate. I just want to make this very clear. I understand that this will happen. They postponed it for 1 year. And there are a number of investments in ethanol plants that were made and need to be remunerated. I think that they will do it, and there will be a conversion from sugar to ethanol. So we have an expectation that this will happen next year faster because next year, they will recover sugar production that comes from a very low base. I think that the base for this year will be close to 31 million tonnes in the subsequent year, they will recover. And with that recovery, part of that sucrose should go to the production of ethanol, which will help sustain kind of a healthier price for sugar.
Excellent.
Next question is from Thiago Duarte with BTG Pactual.
A quick question Felipe. I just would like to understand the sales strategy of ethanol in the quarter. You sold quite a lot. If you think about historical proportions for Q1 compared to what you should produce this year and thinking about your mix? And I have the impression then that you didn't carry a lot of inventory from the previous crop year to this season. I just want to understand, was this limited by your physical capacity of storage or any reason why you sold so much ethanol this quarter? Considering what you mentioned regarding a price recovery expectation, which partially happened in the quarter, but which is clearly happening more now, moving towards the second half of the crop year, as you yourself mentioned.
Thiago. You see we sold about 22% of the total volumes that we are going to produce. So although we believe today, the prices tend to recover in the first months of the season, we've kind of in doubt regarding the fuel's price dynamics, whether the prices were going to drop or not. And the position of our commercial department was to be somewhat cautious to -- not to carry too much inventory because if something happened along the way, if the oil prices dropped a lot for whatever reason or if the dollar price dropped a lot and the prices in Brazil dropped a lot, that could hurt our margin a lot. In Q4, Q4 was impacted and it was frustrating in terms of the prices of ethanol. And our decision was not to just wait and see what was going to happen. We decided to keep the minimum 20% -- to put 20% of what I have available for sale.
It is clear. If I may ask a follow-up question. Considering the average for the industry, for the mid-south for sugarcane, where do you think you stand today when we look at the average production cost of ethanol? Close to 500 per cubic meter. Where do you think the industry is in terms of production cost on average?
Well, I think that the industry is 20% above that.
Okay. Clear.
We would like to conclude the Q&A session. And I would like to turn the floor to Mr. Felipe Vicchiato for his final remarks.
Thank you very much for joining us, and we are certainly available to answer any further questions. And I hope to see you again in the middle of November for our next earnings release presentation. Sao Martinho's conference call is now concluded. Thank you for joining us, and have a very pleasant afternoon.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]