Sao Martinho SA
BOVESPA:SMTO3
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Sao Martinho SA
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Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to São Martinho S.A.'s conference call to discuss the second quarter of the 2018/19 harvest earnings.
Today with us, we have Mr. Felipe Vicchiato, CFO and Investor Relations Officer; and Mrs. Aline Reigada, Investor Relations Manager of São Martinho.
The audio and the slides of this call are being broadcast simultaneously at the company's website, saomartinho.com.br/ir.
[Operator Instructions]
We would like to inform that some statements made during the conference may constitute forward-looking statements. As such, they are subject to known and unknown risks and uncertainties as well that could cause the company's actual results to differ materially from those expressed in these forward-looking statements.
Now I would like to turn the floor over to Mr. Felipe Vicchiato, who will start today's conference.
Good afternoon, everyone. Thank you for participating in our call about the second quarter.
Let's start on Page #3 with the agenda of the themes that I will be tackling here with you. First, we will be talking about the operating results of the harvest year as well as what will happen in the next few days and financial highlights, number 2. Inventories at the close of the quarter and the expectation for sales of ethanol and sugar for the third and for the fourth quarter. The fourth item, we will talk about the evolution of the company's indebtedness. The hedge position, 5. And closing with the scenario for ethanol and some remarks also about the sugar scenario for the next crop year.
Now going to the next page, Page #4. We have a summary of the operating highlights at the end of September. São Martinho crushed 18,429 tons, 1.3% less than the same period last year. Own sugarcane practically stable, and 6.2 million to 6.5 million tons, dropping a little bit, in third party sugarcane. And our yield dropped from 82 to 75 tons per hectare and this is a point of attention here because of the dry season and that had a negative impact on São Martinho's harvest. So we will lead to the guidance around 25 -- 20.5, but the take-up would be better if it were not for this very dry weather that we had during this harvest.
The production of sugar, 20% less than last year due to the change in mix as we said before. And production of ethanol went up 29%, going from 762,000 to 983,000 cubic meter. We expect to close the harvest in the next few -- next 15 days. We only have 2 mills crushing right now, Boa Vista and Iracema, and São Martinho and Santa Cruz have already closed the harvest. And as I said before, the production of sugar and ethanol will be more or less -- in the guidance 1% more or less over TRS equivalent that we will decrease a little bit the ethanol production, but our expectation was around mid-June.
And talking about harvest, we have just started the rainy season now, but we could give you an idea. The rainfall in October was quite good, very good point for the harvest and mainly for the sugarcane from the half on, so the perspective for next year is very good because of the sprouting. And that should be volume of sunlight and rain will remain more or less the same, but we have already started on the right track in October because of the rainfall and this helps a lot in terms of the yield of the next harvest.
On Page #5, we talk about the result for the quarter. Net revenue of the company dropping by 12% going from 763 -- BRL 736 million to BRL 643 million. Basically, the drop in the net revenue comes from the lower volume of sugar sold in the quarter. 47% decrease in the amount of sugar result of the mix between sugar and ethanol. And we exchanged sugar in order to sell it in October and March in the screen because the prices were better than July -- the July screen because the July screen was very much affected because it was in full harvest, the Brazilian market, and we still had a lot of sugar production. And the strategy of the commercial area was to grow the screens in order to carry out the sales in the next 2 quarters and the hedging has already been done and we'll be talking about that on the next few slides. So we are -- we already have the pricing and the forecast for the quarter and most of it will probably happen in the third quarter. The EBITDA from the lower volume of sales, sugar dropping 19%, margin 49%, EBITDA margin -- EBIT going to BRL 122 million, so a drop here. And financial results and improving because of the decrease in financial expenses and one nonrecurrent item that happened in the previous quarter, the hedge accounting, the shareholders' equity. And with that, we have the net income before taxes, this level.
And on the next page, we talk about our inventories for the second quarter and the expectation for production in the next 2 quarters. We closed with an inventory of sugar of 565,000 tons in September. Adding to the production that will happen in October and November, we will be having a volume equivalent to 61% of the total production of sugar and that will be sold in the third and the fourth quarters. Such as the case with ethanol, we have the same here in ethanol. And we will have a third and the fourth quarter that will be very strong from the viewpoint of sugar sales, in line with what I have just said about the rolling of screens that I mentioned.
Ethanol inventories going up 34%, going from 453,000 cubic meters to 610,000 cubic meters. And the reason why the inventory went up was because of the increase in this mix towards ethanol in this crop year. And the volume of 610,000 added to the production that we will have in the next few months, we will have more or less 2/3 of the harvest in order to be sold of ethanol in the third and the fourth quarters.
And we are very bullish about this third and the fourth quarter as well. The prices should be better than they were during the first and the second quarters, but our expectations are matching with that. For the full year, we will be able to have close to BRL 1.85 on average per liter and with the combination, of course, of the amount of anhydrous that, that produced, the volume that, that produced at Boa Vista with the tax benefit and the strategy of sales of Boa Vista, which is much more allocated in the second half because the players at the region have a lower tankage vis-à-vis São Martinho. So this means that the prices in the region of Goiás suffer a little bit less than the São Paulo region when you have a surplus in the supply -- when you have an oversupply. So all these combined brings us to this degree of optimism that we presented the price of São Martinho should be around BRL 1.85 on average per liter for São Martinho. This price could be higher and maybe higher if the price of oil and the dollar recover until the end of the crop, but considering the current prices of gasoline and the dollar at the level that it is, we understand that BRL 1.85 is a very feasible number.
So let's go to Page #7 now. We talk about our debt. The comparison of March and September, going up 25%, BRL 2.4 billion to BRL 3 billion net debt. And the main evolutions were the working capital that was used because of the period that the crop and strategy of carrying over the inventory of ethanol and sugar will be effect of the exchange rate variation, growing some BRL 3.3 to BRL 4 at the close of September.
Our net debt today, 35% is in foreign currency or in dollars and 65% in reals. And most of the debt profile is being financed by the capital markets, mainly issues of CREs that we issued in the last few years, the BNDES here as well as banks and financial institutions both in Brazil and abroad. So we are comfortable with this debt level. We have BRL 1.3 billion in cash at September 18, not to mention the inventories that are to be sold and that would add, let's say, about BRL 5 billion. And with the debt profile that, for the next couple of years, is about BRL 1.8 billion.
On the next slide, we talk about our hedge position for the current crop and the next one. For the current one, we have 97% exposure in our own cane already hedged, that's something close to BRL 1,116 per ton. We have 95 -- 97% of the sugar has already been hedged and 65% of the dollar hedged already. And the figure that we show you here is the MTM number considering the current dollar rate. And the reason why we do not hedge for the current harvest now is because we have some obligations in dollars, so we have to be logged in dollars in order to comply with these obligations. The payment for crop protection, for instance, is an input that is in dollar and we have to do this in dollar. So we have 300,000 tons of sugar already hedged at BRL 1,186 per ton, 44% of our own sugarcane. And at the moment, we have these hedges in dollar in sugar. And at the stock exchange, this number is practically guaranteed.
Now the next slide, we talk about the scenario for sugar and ethanol. I will start about the sugar scenario. Last week, there was an important event here of Datagro talking about the sugar and ethanol market and they reviewed their expectation of deficit for sugar for the next couple of years. And this is one of the reasons why the price of sugar went up very quickly. I will turn the last 8 weeks and we can see this on this chart, a major recovery from BRL 0.10 to BRL 0.13 as you can see on the chart. And now prices went back a little bit. And we are now understanding this price is not going to change a lot until the Brazilian crop resumes and confirms the mid-single view.
In the case of ethanol, in spite of the recent drop of prices, we had a very strong growth in prices in the last -- or the first week of November, the price went down a little bit. But in spite of that, we are talking about prices going up year-on-year. And looking at November, it's 7%. On the average, it is much better than last year. And in order to reach the target of São Martinho of closer with 1.85 per liter of ethanol sold, we assume that the average price of the second half will be about 5% higher than the average price that was realized in the same period last year. So this is not an aggressive projection due to the dynamics and the increase in the oil prices that happened from then on. And not to mention the taxes because in August last year, there was an increase of PIS and COFINS taxes for gasoline and ethanol and this improved the competitiveness of ethanol at the front vis-a-vis gasoline.
And I would like to remind you that they have finalized our talk about the market. Ethanol prices today at the pump, they are much lower than parity. And although we have a decrease in the consumption of fuel, the decision of consumers is still going towards ethanol instead of gasoline in the main consumer market. And so we understand that the prices will react.
Let's see. Next week, we have a long holiday, which is the November 15 and 20 of November as well. Usually, during these long holidays, the distributors recompose their inventories and this could help this increase in the price of ethanol for ethanol producers.
And lastly, comparing from January to September 2017 to '18, the same period, we can see that hydrous is going up, growing from 28% to 40%. So this helps prices to go up and the inventory levels of ethanol being consumed until the end of this crop.
These were my initial remarks. And now I would like to open for questions.
[Operator Instructions] Danniela Eiger for Bank of America.
I have 2 questions, in fact. The first one has to do with the price of ethanol in the intercrop period. I would like to understand, with BRL 1.85 that you referred to, considering the price of oil and the current exchange rate, are you taking into account the consecutive drops that were announced, over 20% of the price of oil that had been announced? And how do you see this drop in the price of gasoline for the prices of ethanol? Because the parity is still favorable to ethanol, but it is also because we have not seen the drop in gasoline prices being transferred to the pump prices. So if this parity is adjusted because of the lower gasoline price, could we see a decrease in demand of ethanol? And how do you see this risk for the intercrop period for ethanol demand?
And the second question has to do with the cash cost. We saw an increase in ethanol and sugar. Maybe in ethanol, more temporary because of the concentration of sales here in São Paulo. But what are the trends that you see for sugar, mainly, and also for ethanol for the second half? These are my questions.
Danniela, the BRL 1.85 price is a price looking at the oil market and the dollar rate as it is today, the exchange rate as it is. And I would like to remind you that when you have a drop in the price of gasoline at the refinery, in order to transfer the price to the pump, well, this is not something so straightforward. It's not because of the price dropping 20% at the refinery that the same will happen at the pump because there are many taxes and there is a margin that is charged by distributors and by the fuel stations. And a drop at -- of the gasoline prices at the refinery, this is usually transferred only about 1/3 to the pump. But BRL 1.85, we believe, is a feasible number.
Just to give you an idea, last year, it was BRL 1.73, the São Martinho price. Well, it's per liter, the average price of São Martinho. For BRL 1.85, this means that 7% decrease year-on-year only. Assuming -- well, if you look at the bigger snapshot, the increase in oil prices year-on-year, the increase was much higher than 7%. So we believe that, all in all, 7% increase of São Martinho year-on-year. Well, this is the ratio. And of course, looking at the market today, again, if the oil price was about $80, well, this would be even higher, but we believe that BRL 1.85 is very feasible in terms of materializing.
So your second question regarding cost, the cost that went up the most was the ethanol cost. In the financial statement, we mentioned that the cost for the quarter went up 14% because of the sales. We assume the cost will reach 75% of the sale of part of the ethanol from São Paulo -- on the São Paulo mills. And on average, the São Paulo mills have a 40% higher cost for the production of ethanol vis-à-vis Goiás mills. As of the third and the fourth quarters, you will see Goiás -- and this tend to dilute the cost -- the unit cost and it will be in line or even lower than inflation.
In relation to sugar, year-to-date, we've had a drop of 1.3% if you compare the half year and the half year is much more impacted because of an increase in third-party sugarcane. In the second quarter, you crush more third-party cane than our own sugarcane and because of that, you have a higher cost. The cash cost is higher in this specific quarter due to this reason.
Lucas Ferreira, JP Morgan.
The spike of sugar happened in October after you closed the quarter, in fact. So have you taken advantage of this wind of opportunity in October in order to accelerate your hedging? And we saw, looking at the exchange accelerating -- I don't know whether this was your case or not. Maybe you could give us some color whether this was your case.
And the other question is, in the medium run, when will you resume discussions about growing and maybe growing your ethanol project? Do you have any projects that makes sense for the company? What do you expect to see in terms of variable? Do you think that sugar has to go ahead much more and the theme that the ethanol market is going well given the current economic conditions? So what are the variables that come into play and that you measure in order to talk again about investments and whether you already have some talks about new investments?
Lucas, one interesting thing that happened was that when you saw BRL 0.10 shorter screen of sugar combined with the exchange rate of the time, we've had BRL 1,100 per ton or 100 -- BRL 1,150. And when it went from BRL 0.10 to BRL 0.13 at the exchange rate, that's BRL 3.7. We continue to have BRL 1.5 and BRL 1.15. So in practice, this didn't really change in reals per ton. And this is what is important for Brazilian producers so -- going from BRL 0.10 to BRL 0.13. Then in September, besides the 3,000 tons, we had 30,000 tons more that were realized, but also at BRL 1.15 and BRL 1.18, BRL 1.15 and BRL 1.18.
Secondly, we have many projects in the company and that are being analyzed, but they are still projects, that is to say they do not have the initial or the necessary return in order for us to justify the investment. The first one would be the expansion of Boa Vista because you have areas available in order to plant sugarcane, but given the size of the investment that is necessary, although I'm optimistic regarding ethanol, the return would still be too small or too narrow. So there is nothing new that I could talk about regarding investments. Maybe in 2 years' time when all of you starts and plus the price of ethanol reach reasonable levels for us, we will think about making new investments, but so far, we have nothing to tell you about that.
Gustavo Allevato, Santander.
Felipe, I have 2 questions. Regarding growth, how long would it take for you to have an important growth at Boa Vista in order for this to materialize?
And the second one has to do with costs. Let's say you are able to produce 22 million tons, what would be the earnings that you believe you would be reporting this year?
Gustavo, I'm going to start with the second question. 2 million tons more with the necessary yield, that is to say in our own land, I'm not buying sugarcane from third parties, let's say, I plant it and I harvest it, I cannot tell you off the shelf, but I would be increasing BRL 150 million per year.
And the marginal cost would be just?
For the sugarcane, it will be the higher cost of diesel to crush the sugarcane because the driver is already there, so the fixed cost will be diluted. So I would have about BRL 150 million more. I expect we will have a typical summer next year and we go back to 22 million. This is what São Martinho tend to deliver.
In relation to your first question, could you repeat because -- is it about investments in brownfield in order to start crushing?
Yes.
First, we have to plant and it takes up -- from 2 to 3 years in order for you to crush the first 1 million ton of sugarcane in order to start running. So we need an additional 4 years to get to a minimum size of 3 million tons if you really accelerate planting. But if you accelerate too much, you run some risks that have to do with the structure. You have to hire more people then you have to demobilize these people in an area that doesn't have abundant labor. So you have to bring labor from São Paulo to the region, so the logistics are rather complicated. So in order to have an economically feasible size so that the company may reach breakeven, I would say 4 years for 3 million tons. And this is the reason why all new investors in ethanol take a long time because we have to be very comfortable with the scenario because we have to put a lot of capital in order to grow and have the returns afterwards. Boa Vista started to get profit 8, 10 years afterwards and now it's great. It's the best in the group, very low cost. But at the beginning, we had losses and it took a long time for us to have this situation as well São Martinho with all the expertise that we have, so we have a lot of CapEx initially. And for return, that will take quite a few years to come.
Looking at the current price levels for the next harvest, would it make sense to maintain the same mix that you are having this quarter? And -- or could you increase production of sugar a little bit?
I understand it would make sense to keep the same mix. And the production of sugar today, the price of sugar for next year, if we lock it, it will be close to 1.7 thousand -- 1.65 per liter of hydrous ethanol. And as we have a major capacity to store ethanol and assuming that oil prices and oil prices go up, let's say, 5%, 6% year-on-year, São Martinho should have this kind of mix for next year. But as you said, it's a little bit too early to say that. Maybe we could go back to that in the next quarter, but this could change and the speed of change is very fast.
Gabriel Barra, UBS.
A follow-up in the price of ethanol in the intercrop period. I believe you would have to reach 1,950 in the second half of the year in reals. What kind -- in the second half of the year, when would you start to be concerned about the price?
And the second has to do with production for next year. '17/'18 had a price that was lower than the historical level, but as you said, in October, the situation was better. And I would like to know if there is any chance of starting the new harvest a little bit before it is activated?
And also regarding yield, what could we expect about the 22.6 million tons for the next crop year? Will you keep this figure with a better perspective regarding pricing?
I will start by the second question. No, we will not bring this forward. We are not going to start before April. São Martinho usually starts on the first week of April and if you start crushing in March, you end up crushing sugarcane with very low TRS and you take the sugarcane from the cycle. So this hinders the whole plantation. And we could only make the decision of doing this one week before or 2 weeks before only if in March, we look at the field, the sugarcane field and we see that we have over 24 million, which is the only factor that could lead us to bring this forward. But if we have a typical summer -- even if we have a typical summer, we believe that we will not reach 24 million, but we are still ramping up planting so it will take some time for us to get to the 24 million.
In relation to your first question, the price dynamics, well, if you look historically, in the intercrop period, the price of ethanol, even with the stable gasoline price when the price of gasoline was controlled in Brazil, you will see that the price of ethanol goes up anyways. So in a few years, it went up to 75% at parity because there is a shortage of the product. So I cannot tell you, well, if the price of gasoline at the refinery goes down so much, I run the risk of not reaching BRL 1.85, this is not an exact science. I cannot say that because you have inertia in the consumption of ethanol that is already happening. So the consumer has already been used to consuming ethanol and it is cheaper. Sometimes it is -- gasoline is BRL 5 and the ethanol is BRL 3. So let's say the price of gasoline goes down an additional 10%. In spite of that, we can still have BRL 1.85. Of course, if there is a collapse in gasoline prices, let's say, 25%, then this would be another case, but as I said before, not all this drop in the refinery goes to the pump. So you have many other factors and costs that come into play in this way up to the pump.
Thiago Duarte, BTG Pactual.
Felipe, I think the dynamic of ethanol prices is very clear for the remainder of the crop year and -- with BRL 1.85 as being feasible for the whole year, but I would like to hear from you the view that you have about -- or at least the reading that you have about the performance of the ethanol market so far because this year so far has been a little bit nontypical. The inventories went up earlier so if you'll take the last -- or most recent data by the government, the inventories are still quite high and the prices as of August changed a lot, which is not common at that time of the year. And recently it started to go down if you take into account the weekly base. So why is there this mismatch between the inventories and the prices over the last few months?
And the second question has to do with the precatórios, the precatórios of Copersucar. Do you keep the same view? Or in your opinion, do you believe that the schedule that you have been sharing with the market will be maintained, the first precatory, you already have the first tranche paid this year and the first payment of the second precatory should happen next year according to the schedule that you have been informing to the market. So could you tell me that if nothing has changed?
Thiago, in relation to ethanol, what happened in August that you referred to, mainly in September, that ethanol went up more. There was the truck drivers' strike. And because of that, we have the low level of fuel at the pumps in Brazil. As of the moment, the fueling stations were able to receive material again. There was an increase in the price of ethanol. Of -- in order to explain August and September, because this is not typical to have this increase in ethanol prices during this time of the year, and I think the best explanation is this, because it went up very quickly because of this strike. In October, prices continue to go up, more or less in line with some consumption and the solo parity. And more recently, the prices dropped in the last couple of weeks.
We believe that this drop in ethanol prices is more linked to an oversupply of ethanol. The harvest is coming to an end and you can see the amount of ethanol that you still have at the tank. And you have to sell the product in order to get cash in order to pay obligations. So I would say this is the reason.
Honestly, I do not see anything related to supply and demand to have this drop in the last couple of weeks because the crop has already ended, the consumption is strong. And the harvest will not start in March, it will start in April. And the volume of sugarcane will remain the same, unless we have a very big problem in summer. So there is no economic sense for this drop in the last couple of weeks.
Maybe it's a little bit related to the drop in the refinery prices and the exchange rate that is a little bit more favorable to the real, but in spite of this drop at the refinery, if it has not impacted the pumps or the gas stations yet, it does not explain this drop in the last 2 weeks. And we are very comfortable with that and we will continue with our strategy of selling gradually during the third and the fourth quarters. Demand is quite strong, parity is low, so we have to wait for the harvest to end. And the long holidays are very important for us to see the demand on the part of distributor. So usually, consumption goes up steeply during long holidays.
In regard to the second question, the schedule continues as informed. We believe that the first precatory, we will be able to raise this money that has already been paid by the end of the fiscal year, that is to say March 2019. So if it doesn't come in during the third quarter, it will come in the fourth quarter, so totally preserved. As you know, it has already been issued. And next year, we will probably have 15% and then 5 equal installments in the second precatory.
And just a follow-up regarding the first point about ethanol. You mentioned an interesting point, which is the demand on the part of distributors because of the holiday. So my question is the following. We look at the data from ANP up to September, August and September, and we see hydrous with a demand at least of 1,800,000,000 liters per month. We are talking about 2.6 billion, 2.7 billion liters per month of total ethanol. So in your opinion -- well, I know that maybe I'm not asking the right person because you're not at the final stage of this chain, but you're trying to understand the demand on the part of distributors, but do you believe that this level of demand for ethanol has gone down in the last few weeks? Or I don't know whether you could answer that.
No, it has not gone down. Well, the distributors are not too many. You only have a handful. And in this market, you have a lot of producers and a handful of distributors. So in our opinion, the -- those are ending the harvest and they have to sell ethanol. And you'll have an oversupply, in fact, but demand continues to be very strong.
Antonio Barreto, Itaú BBA.
A quick question, Felipe. When you mentioned 75% in São Paulo, 75% in your inventory, what is the percentage of your inventory that comes from Boa Vista? Your current inventory, what kind of percentage?
Antonio, give me just one second. Antonio, you're talking about Boa Vista? Approximately, the inventories plus the volume that I will be producing until the end of this harvest, 270,000 cubic meters approximately.
Ian Miller, Crédit Suisse.
I have 2 questions. One is more a follow-up on the question asked by Thiago, the precatórios. Once they are paid, what about the taxes? Could this be seen as indemnification? Will taxes be levied?
And the other one has to do with you. Of course, the dry weather affected your production this year, but I understand that there should be an impact or a mitigation of the impact because of the dry weather. What about the pipeline of MPB for you, thinking about the next few years?
About the precatory, once it is paid, as Copersucar is the owner of this case, it collects all the taxes and deposits, the core deposits and discusses whether this is going to be considered as indemnification or not. And this will take years and for São Martinho to be 43% of this volume. And then you have these additional deposits of the taxes and then you have to wait for the final decision.
And the second question, about yield, 75 ton per hectare. As we said before, in October, it's helping us. There is some impact, yes, of the dry weather on the next harvest, but the impact is only on the sugarcane. 35% of the sugarcane was harvested, more at the beginning of the harvest. And the remainder, while the impact will be much lower because of the rainfall and up MPB, in -- well, next year, it will help to mitigate this impact of the dry weather. And given a reasonable weather condition, we will be able to -- of 22.5 million, 22.4 million.
Roberto Browne from Morgan Stanley.
A follow-up regarding the sale of ethanol and your commercial strategy for the next few months. Practically, all the sales was in the fourth quarter last year. And this year, could you bring this forward to the third quarter given the fact that the exchange rate is not varying a lot and the inventories in the industry are higher? So do you think you could have more imports in the fourth quarter beyond the quota?
Imports, well, this is not very probable because with -- even with 20%, it doesn't really -- it would only be happen if it were over 2,000. In the last 4 years, our commercial strategy carried over ethanol to be sold in the third or the fourth quarter, but this year, we carried over the same percentage. However, the volume was much higher because we changed the mix towards ethanol. Based on that, what we did was the following. We accelerated sales. We sold mainly in São Paulo, a major volume of ethanol. I would say that when you look at the numbers for the third and the fourth quarter, you would see more or less half and half in the third, 51% in the third and 50% in the fourth. But to the prices that we have today, we stopped selling for some time and we only sold anhydrous what was already contracted. And in October, we sold a little bit in the spot market mainly in São Paulo because of the prices.
The Q&A session is closed. And I would like to give the floor back to Mr. Felipe Vicchiato for his closing remarks.
Thank you very much for participating in the call. And as I mentioned before, we are very bullish about the next few quarters. And in the next quarter, I believe I will be able to give you more color about the yield for next year and we will be publishing this in mid-February. So we will already have had some months of rainfall and it will be more clear to us, this yield for next year. Thank you very much and goodbye.
This conference call is closed, thank you very much for participating and we wish you a very good afternoon.