Sao Martinho SA
BOVESPA:SMTO3
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
24.24
34.06
|
| Price Target |
|
We'll email you a reminder when the closing price reaches BRL.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Sao Martinho SA
You don't have any saved screeners yet
Good afternoon, ladies and gentlemen. Thank you for waiting, and welcome to São Martinho S.A. Second Quarter of the '21/'22 Crop Year Earnings Conference Call. Today with us, we have Mr. Felipe Vicchiato, Investor Relations Officer and CFO; and Mrs. Aline Reigada, São Martinho's Investor Relations Manager. The audio and the slides of this call are being broadcast simultaneously on the company's website, which is www.saomartinho.com.br/ir. [Operator Instructions]
We would like to inform you that some remarks made during this call may contain projections or forward-looking statements. And as such, they are subject to known and unknown risks and uncertainties as well, which may lead such expectations not to materialize or be substantially different from those expressed in these forward-looking statements.
I will now turn the floor over to Mr. Felipe Vicchiato, who will start the presentation. Thank you.
Good afternoon, everybody. Thank you very much for participating in São Martinho's conference call about the second quarter of the current crop year.
And we will start by Page #4, conclusion of the crop year. We published a material information with the main production indicators. So here, we have São Martinho -- the conclusion of the crop year was yesterday, 19.9 million tons of -- a decrease of 11.7% vis-à-vis the previous crop year, mainly due to the lower yield of sugarcane per hectare, going from 81 to 72 per hectare. This was caused by the strong drought that we had in Brazil, in the center-south mainly during this period, partially offset by a partial improvement in the TRS. This is why we had a 12% drop in the production of sugar, 1.5 million to 1.3 million. A decrease of 22.8% in the production of ethanol -- hydrous ethanol, reaching 520,000 (sic) [ 521,000 ] cubic meters in the year. However, an increase of 13.5% in the production of anhydrous, 379,000 (sic) [ 389,000 ] cubic meters in this crop year. All the TRS, first, we put -- in anhydrous, because of the strong demand for...
[We have lost the sound. Yes, there is a problem here. There's a problem with the sound. The interpreter asks you to please stand by. We are waiting for the call to resume, so please stand by.]
[Technical Difficulty]
We apologize. Let us resume our call going to the next slide in financial highlights. The company had a growth in net revenue of 54% because of the better prices both of sugar and ethanol. And as we can see here on the lower part, sugar, 43% increase; 68%, ethanol; with stable volumes and the decrease in sugar, ethanol. 65% increase in EBITDA (sic) [ Adjusted EBITDA ], EBIT 117% increased (sic) [ Adjusted EBIT 117.6% increased ], net income 11% increased.
I would like to mention that in the last quarter in this period we had the results of the IAA 21, which hinders the comparison with the second quarter '22. When we look at the net income and the cash income leverage of the company, very healthy, 1.21x. And this is the reason why we made the decision to prepay dividends as we have already communicated to the market. And yesterday, we forwarded this dividend and interest on equity in the [ addition ] of BRL 500 million in distribution to shareholders already now at the end of November.
On the next slide, we can see the company's cash cost. We had an increase in the cash cost of sugar and ethanol because of the inflation that hit our agricultural inputs and industrial inputs. And as you can see the breakdown of the main impact here year-to-date, the Consecana price, the price of the sugarcane and the lease is directly linked to the price of sugar with ethanol and the prices are better. We have a better cost as -- higher cost as well. In isolating the price of Consecana, we have the impact of 6% because of the shortfall in our harvest because we had the lower production. So we dilute the cost less. So we have this increase in the unit cost. And diesel, 2.8 percentage points of the 38.6% total. Other imports. Here, we are talking about fertilizers mainly, 7.2% of the total. And labor and others, 2.7%.
And with that, in the case of sugar, we have, in the half year, we have 1.7 percentage point decrease in the margin. If you look at the cash cost, as we had the hedge of sugar that was posted to the revenue of this quarter, in the case of ethanol, as I do not have a hedge, we have 16 percentage points increase or improvement.
Afterwards, we see the indebtedness of the company. Comparing March to September, we see an increase of 23% -- 20.5%, reaching BRL 3.2 billion in net debt. And the main item that made this increase was the working capital, BRL 725 million (sic) [ BRL 775 million ]. And because of the inventory that I mentioned in the first slide, when we talked about the operating side, we have a lot of products to be sold yet. So sugar and ethanol over the next few quarters, expansion CapEx, improvement CapEx. And here, you already have the corn ethanol and the investment already announced for the power plant and the investment that we've made, another BRL 300 million. Of our overall debt, 19% was in foreign currency, 80% reals. Over half of the debt in reals was linked to the CDI.
On the next slide, we have the sugar and ethanol markets and our hedge position, '21/'22 harvest. What has to do with our own sugarcane, we're practically 100% hedged: as you can see here, 1.64 (sic) [ BRL 1,864 per ton ]. For '22/'23, we have almost 420,000 -- BRL 1,932 per ton approximately. This means about 40% of our exposure in sugar -- our own sugar for the next year and which is reasonable if you consider the moment in the cycle and the good perspective for the prices of sugar from now on -- once Brazil should not recover production a lot for the next year. And we still have some issues regarding other countries in the Northern Hemisphere. that should not be increasing the production of sugar. In the case of ethanol, prices improving in the last few months because of the price of gasoline at the pump. Parity of hydrous ethanol is something close to 80%, and the demand for hydrous is decreasing and anhydrous increasing because of the consumption of gasoline. And this is the main reason why we decided to produce more anhydrous in order to cater to the market.
And lastly, we have a summary of our CapEx. We estimate -- we increased our estimate for CapEx approximately BRL 400 million what we have -- over what we had already informed before. And the main items regarding this increase in the CapEx: The maintenance CapEx grows from BRL 1.3 billion to BRL 1.5 billion approximately. And when I separate the increase in the maintenance CapEx, I have about BRL 18 million that refer to the increase of agricultural inputs in order to improve the nutrition of our sugarcane field. Looking for a faster recovery because of the very strong drought that we had and also frost in some regions. So this is a one-off investment this year in order to increase the yield for the next year.
BRL 70 million effectively has to do with an increase in cost because of the NPK that increased quite a lot. Fertilizers about 75% year-on-year increased, a very strong increase that we saw, especially in the last 4 to 5 months. And lastly, geography plus accounting because I have brought forward the harvest. That is to say we ended the harvest sooner than we expected. So instead of having some expenses as cost, they are posted under assets and with the depreciation in the following years. So this -- it will be less OpEx and more CapEx, but this is a matter of geography only.
And the other BRL 190 million (sic) [ BRL 180 million ] refer to other projects that we have already approved and a -- we brought forward also in our project for corn ethanol. So we will be investing an additional BRL 50 million in this project, more than was expected or estimated before. And we are going to accelerate as much as we can this project in the next crop year, let's say, between October and November was our estimate, but we are trying to bring this forward. We are trying to do it sooner. But as the project is better now in terms of returns, so we are trying to bring it forward and place this ethanol as soon as we can next year. And the others have to do with BRL 130 million with -- internal rates of return, as you can see here.
So these were the initial remarks, and we apologize once again for the technical problem. And during the Q&A, you can ask me about anything that you have -- might have missed during the presentation. Thank you.
[Operator Instructions] Our first question comes from Luiz Carvalho from UBS.
Felipe and Aline, I have 3 points I would like to address. Capital allocation is the first question. So you have already talked about CapEx, but I would like -- taking into account the level of hedge that you have, you can have quite long predictability in terms of the cash generation that you will have. So I would like to understand how we should think about your capital allocation. You have already announced dividend payout about -- if I'm not mistaken, 100% of the payout?
And I would like to talk a little bit more about the core ethanol and also second-generation ethanol. Maybe you could expand on these 2 subjects. And the other question has to do with the '22/'23 crop year. You said, Felipe, that there was an impact because of the weather, very dry weather, as well as frost in some regions, with a negative impact on your harvest. So I would like to know your frame of mind in terms of volume -- crushing volume for the next crop year.
And also, if you could talk about hedge. Because we haven't seen for a long time prices of sugar around 18 close to 20 and we see a hedge lower than we expected. So maybe you could talk about that.
And one last question. Could you talk about the recent drop in the ethanol import tariffs and what kind of impact do you believe there will have?
Luiz, thank you very much for the questions. Well, let me see if I can remember all of them. I would like to start by the second. When you say that you saw BRL 0.18 -- BRL 0.18, BRL 0.19 for a long time and our hedge is BRL 0.15, your question is why we do not hedge a higher amount in tons? Is it your question? Or a higher price?
We expected a higher hedge in the dollar per ton. This is what we expected.
Okay. Perfect. What happened was that we hedged way back then -- we are in November now -- and we hedged about 6 months ago, so much so that our evolution from the last quarter to this quarter in terms of the number of tons of sugar hedged was very small. I think it was 20,000, 30,000 tons. And the initial hedge of 381 was done 6 months ago. And at the time, it was BRL 0.15, BRL 0.16. And this is the reason why you do not see a big evolution.
And what happened?
So that after we hedged, we had the frost, the very long drought. And there were fires in many regions. And I think we hedged before March the lower part. And after that, we had all these weather conditions, and there was an impact regarding the production of sugar in Brazil. The initial estimates for the harvest were about 580, 590. And it was 515, in fact.
And then when we saw the situation impacting our sugarcane, we stopped hedging, but what happened was that we did that right at the beginning, and the price was still low. Just to give you an idea, the 72 tons per hectare of São Martinho of TCH -- I have been in the company for 16 years, and I have never seen a such a low level in my whole life.
And when you look at the numbers published, you will see around 60. And the drought was very, very strong and very long. And there were many fires, and there were frost. And the sugarcane fields were heavily impacted because of that. And when we stopped hedging in relevant volumes, on average, we see it stayed about at BRL 0.15.
Your first question has to do with capital allocation. In investments already scheduled, BRL 650 million for the corn ethanol mill. And BRL 500 million in this crop year, the biggest volume. You have the cogeneration plant, BRL 350 million, half now and half next year. And the project that we approved recently, BRL 130 million overall. And that should be this year with a small amount going into next year. We started to study all the technical details, the engineering details. And this is the second phase of the corn ethanol plant. And when we approved the project about 1.5 years ago, we approved a project that was able to expand very quickly. And given the fact that they have a very strong demand for ethanol, and this is what we see for the next few years and the better price as well, we are already analyzing the second phase of the ethanol, the corn ethanol mill.
But right now, I cannot give you any detail about CapEx or CapEx increase. Because after we closed -- after we bought most of the equipment for the current plant, the CapEx cost went up very steeply. And probably, we will see a higher CapEx in that second phase. But based on our preliminary studies, it will still give us a good return. So this is a big capital allocation that is being started.
And in the other areas, it has to do with dividend payout and remuneration of our shareholders. We have already prepaid, as you said yourself, almost 100% of our earnings. And the reserve that we had we brought forward, and we are paying this through interest on equity and dividends. And in the third and the fourth quarter, let's see the results. And these are the main projects that we have regarding capital allocation.
And the ethanol 2G, we are still doing the preliminary studies. We are choosing the most feasible technology that fits São Martinho and whether we should invest or not given the high cost of the 2G ethanol production. Right now, we have no further information, but we are waiting to develop this project, and we will make the announcement when we have some definition, but we are not -- we do not believe this will be the very short run.
Oh, you have another question. The tariff, a drop of 10%, a very small impact. As far as we are concerned, São Martinho should be importing anhydrous ethanol for the beginning of the next year at the end of this year in order to supply the market. Due to the strong demand that we see for anhydrous, we should be importing in spite of this tariff in order to cater to the market.
Isabella Simonato, Bank of America.
About the mix at the end of this crop year vis-à-vis the guidance that you gave us before, there is a price component, of course, but I would like you to give us some more color. Of course, there is the issue of the weather in the last few months, but it would be very useful if you could expand on that.
And when you talk up with the yield for the next crop year and all the components that you mentioned, Felipe, do you have any indication about the level of TCH that we could expect for the '22/'23 crop year, supposing the weather is stable or "normal"?
Thank you very much for your questions. I will start by the second one. Supposing we have a normal situation -- weather situation, we expect to go back to 80 tons per hectare, but it will really depend on the weather that we see. We believe that, for the Center-South, we will be talking about a weather of low rainfall and worse than that, with a lot of intensity of rainfall for some days and then a very strong Indian summer. So a lot of rain in 2, 3 days and then a very dry time or period. And this is not good for sugarcane. And it's very bad for all the crops, but mainly sugarcane.
So if we confirm the La Niña that is expected to hit us, we will be talking about a not normal situation. This is why we have increased the CapEx for the nutrition of the sugarcane fields. Because when the rain hit the field, the field will be able to recover faster than in a normal summer. If we see a normal summer, it will be about 80 tons per hectare, going back to the previous levels. If we have a summer with the effect of La Niña, we will be talking about 4 to 5 tons tops. And we understand that this will offset the CapEx that we will be investing.
October was good in terms of rainfall. We had a lot of rainfall in our mills. It was not homogeneous over Brazil. But in the regions where we have our mill, it was very good from the viewpoint of planting and also the beginning of the sugarcane.
If you think about the day when you have 6 meals, the breakfast was October, then we had a very good breakfast. So we can really wait for the next meal, comparison -- for comparison purposes.
But we -- regarding the guidance vis-à-vis what we really produced, what occurred was the loss -- the initial loss of yield in terms of TCH. And this was the reason why we increased the daily crushing of sugarcane. So when you have this kind of drop, you have to shorten the harvest. And you do not have a lot of room regarding mix or change in mix.
And the second point was that, in mid-September, the price -- August, September, the price of sugar had a very big evolution. So we chose to produce more sugar in order to tap into the price to the detriment of hydrous.
And the first point was the anhydrous ethanol because we really pushed it. And of course, it hindered hydrous. And this was the reason why we were slightly different from our guidance. But if you look at the ethanol line, the ethanol that we had in the guidance was something close to 625 hydrous, and we [ plused ] 521. And the difference went to sugar. And then hydrous, we preserved and we delivered fully what we had estimated in our guidance.
Gabriel Barra, Citibank.
A few points. One of the points I would like to understand
[The sound is very bad.]
The additional CapEx to recover the field. When we look at the next year, there are still high prices, both for sugar and ethanol. So could you please tell us? Because you had a lot of pressure on your costs, mainly from fertilizers. So how much increase should we expect because of that?
The second point has to do with the precatórios or the court-ordered debt securities and the impact. Is there anything new, any change regarding your position vis-à-vis the court-ordered debt securities?
And you have a relevant amount of ethanol in your inventories for the second half of the year. And remember, you were talking about 1/4 per quarter or something like that. Is this part of your strategy still? These are the 3 points.
Gabriel, thank you for the questions. The first one has to do with the CapEx for the coming year. For the coming year, parts of the CapEx has to do with the inputs. When we think about CapEx, you have the treatment, the crop treatment. And there, you have mainly fertilizers and crop protection products that are part of this number. And at today's prices, fertilizers for the next year are going to go up 20%, 25% in -- for the next year, fertilizers only. So all in all, if you -- we believe that the CapEx should be around BRL 1.5 billion -- BRL 1,550 billion. It would be an increase of BRL 50 million because you have the fertilizers that have this price increase and that partially offset the one-off that we had this year in terms of CapEx.
And the other question has to do with our schedule for ethanol sales. We should be selling about 50% in this quarter, 50% in the next quarter. And as you know, the major volume that we have in terms of anhydrous ethanol in our inventories, it is practically under contract already. And we sell on a monthly basis, so there is no way we can bring this forward because this is all in a contract.
And the other question has to do with the precatórios or the court-ordered debt securities. No change regarding our court-ordered debt securities. So no news about that.
Another point having to do with PSS and Meiosis. Do you have any metrics? Have you been able to measure the impact or how much this lowered the impact of the dry season or the frost? Can you quantify the effect of PSS and Meiosis?
Yes. I asked our agricultural team this question. And our yield would have been 68 per hectare, 4 tons less than we had per hectare if we had not improved this technology 5 or 6 years ago at a reasonable scale. And more than that and something that is very important, many mills will not have seedlings to plant in summer. Because as they suffered with the dry season, the yield was very low. And also with the impact of frost, the need for sugarcane to use as seedling for planting purposes will be much bigger, and the impact on the crushing of these mills will be much higher than São Martinho's because they will have to use their own sugarcane as seedlings. And São Martinho had everything protected in -- we have our greenhouses, and we do not have the impact. If you have a greenhouse, you don't have the impact of a dry season. But of course, if you have a frost, there will be an impact. But the 2 or 3 days of frost that we had, we protected the sugarcane that was at the greenhouse and we didn't have any impact.
And the number of seedlings that I need in order to plant have not changed. And the other companies will need much more. And to make a long story short, besides getting a higher productivity, the fact that I have this technology means that I will not lose sugarcane in the next few years because we have already preserved our seedlings.
[indiscernible]
I know the situation of climate is very complicated, and you have already talked about the [ hedge ] for the next crop year and taking advantage of the situation of the exchange rate. Do you have -- or do you run a risk in terms of variation of prices?
And now regarding technology, what about the studies and the projects in relation of biomethane? We see some companies already producing and announcing and producing biogas. And São Martinho has a different technology. And I understand that maybe this has not proven to be economically feasible. I would like to know your position about biogas and if it is very important for cost reduction for you.
We evolved quite a lot in our study regarding biomethane. We already -- we have already found a partner in technology. We have an MOU already signed in order to have more in-depth studies. And we expect at the beginning of this year or at the end of this year or beginning of next year we will have a project with already the return expected and whether it is feasible in the locations that -- where we have our mills. So next year, we will be able to answer this question. We already have teams studying the go-no-go of this project.
Regarding the inputs, we have already contracted the amount of fertilizers and crop protection products by means of contract. So the amount is already guaranteed. So we do not run any risks regarding the supply of these products. However, the contract are on a floating basis. If the commodity prices vary, this would increase our cost. But our supply team understands that, at the price level that they already are, 25% higher than the current crop year, almost 100% higher than the last couple of years, the risk of having even higher prices is relatively small, but we are paying keen attention to that and hedging for that should this be necessary. But we believe that we will not run the risk of a shortage of the product or nondelivery of the project.
Christian Audi, Santander.
Felipe, congratulations for the results. I would like to start my questions regarding your internal rate of return. Could you talk about the IRR that you see for these projects, let's say, cogeneration, for instance, and corn ethanol? And the other ones that you have added very recently, I think about BRL 130 million. So that we can compare this to what the company is generating today in terms of IRR and what you expect for all these projects.
And the second question, Felipe, has to do with the use of capital. As you generate quite a lot of cash and you have a very low leverage, how do you choose between paying dividends or having a share buyback program?
And lastly, on the sugar side and a global update, if you can. How do you see Brazil in terms of sugar? You have already mentioned a little bit, but what is your expectation regarding sugar prices? And how do you see Thailand and other countries in this scenario?
Christian, thank you very much for the questions. Well, let's talk about returns. Corn ethanol IRR, when we approved it, it was around 20% approximately. At the time, we had the price of ethanol that was much lower because of the oil prices around $50 at the time and also the corn prices were lower, BRL 40, if I'm not mistaken. With the current prices, both of oil and corn and DDGS, which is closely linked to soy meal, it goes to about 30%.
The second project, which is the cogeneration project that you referred to, the investment is about BRL 820 million to [ BRL 850 million. ] We announced this investment in October '19. And from then on, we were able to guarantee the CapEx and the price of energy at the start was BRL 206 per megawatt hour, adjusted by the IPCA, as the IPCA was going up more than we expected and the funding already guaranteed this at the IPCA plus 3.5%. In the case of cogeneration, the cogeneration project is having a very interesting internal rate of return around 20% at year-end because of the low risk. And it is a different risk from the sugar, ethanol and corn ethanol. So it's better in comparison. And the smaller projects that are tactical and that we discover every single year, it is usually between 20% to 30%, depending on the project.
And you asked the second question regarding dividend payout or share buyback. This is always a topic of discussion in the current environment in which we have a legislation regarding the payment of income tax over dividend. We prefer to pay more dividend than to have a share buyback program. Should the legislation change in the next few years, should we see an increase, then we could have an interesting option regarding share buyback, depending on the cycle of both sugar and ethanol.
And you asked a third question about sugar production. India is harvesting as we speak. They should be increasing production close to 1 million tons of sugar. Thailand recovering, going back more or less to this level, but we do not believe this will be a game changer as far as prices are concerned. And the good side of all that and specifically about the India sugar is the policy of increasing ethanol in their own gasoline. It would be about 20% of ethanol in the blend. And this would mean that they would be producing more ethanol than sugar. And in the long run -- or in the medium and the long run, that would be very important. But as far as next year is concerned, we see this kind of situation regarding supply and demand for sugar and it depends -- we were discussing this today. Let's say these prices prevail, many mills -- should this be the case, many mills will be making more ethanol than sugar because the [ green ] ethanol is paying a premium vis-à-vis sugar. So supposing we keep at these levels, the Brazilian harvest should be more ethanol-oriented and sugar would stay at a very good level.
One last question, Felipe. We're back to capital. You have a very good situation in terms of leverage. Are you comfortable with that? Or are you willing to maintain your net debt-to-EBITDA ratio? Or do you have another target?
Well, we use 1.5 net debt-to-EBITDA ratio when we don't have a very big M&A situation or a very big project. But should the company decide to become more ambitious and have a bigger M&A, for instance, this would increase in the short run, let's say, 2 -- 2x. But if we do not have a very relevant project, our expectation is around 1.5x net debt-to-EBITDA in a normal EBITDA cycle -- in a normal cycle, I mean.
[Operator Instructions] Actually, session has come to an end. Now we would like to give the floor back to Mr. Felipe Vicchiato for his closing remarks.
Thank you very much for participating in our call. We will remain available to you should you need any additional details about our release and our outlook for the next 2 quarters. Good afternoon, and thank you.
São Martinho's conference call has come to an end. Thank you very much for participating, and we wish you all a very good afternoon.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]