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 results of the second quarter of the '22/'23 harvest. Today with us, we have Mr. Felipe Vicchiato, CFO and Investor Relations Officer, and Mr. Alessandro Freitas Soares, New Business and Investor Relations Manager of São Martinho. The audio and the slides of this call are being broadcast simultaneously at the company's website, www.saomartinho.com.br/ir. [Operator Instructions]
We would like to inform you that some remarks made during this call may be projections or forward-looking statements. And as such, they are subject to known and unknown risks and uncertainties, which may lead 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.
Good afternoon, everybody. Thank you for participating in our call about the second quarter of the '22 '23 harvest. And on Page #3, we have our agenda. We will be talking first about the financial highlights and cash costs and our forecast up to the end of the year, the company invested the price evolution for ethanol and sugar guidance for the harvest that we published yesterday, and there was a revision as well as the CapEx guidance. We have a summary here on the next page in the quarter. The company had an 11.2% increase in net revenue. Our EBITDA was in line with last quarter. It was very strong in terms of results. Adjusted EBITDA dropped 10% because of the cost increase, agricultural products, mainly fertilizers, et cetera. Our EBITDA margin dropped 3 percentage points, going to 26% net income dropping 42% being 212 million, and cash income dropping -- going to 218. We saw less tariffs, minus 3.8%.
Here, we have a summary for a product where you have ethanol in this quarter, 90,000 cubic meters of ethanol close to BRL 3.8 per cubic meter and which helped this going up 4% quarter-on-quarter. And the coverage ethanol in the domestic market dropped a lot in line with the prices of gasoline that dropped, and ethanol followed suit. But the exports offset the drop in the domestic market. And for the next 2 quarters, we have about 100,000 cubic meters that will be exported, and that will partially offset the drop in prices of ethanol in the domestic market.
Here, at the stage, we have our cash cost in the comparison of the half year up to September, 32% increase. Our cash cost in sugar, ethanol, 30%, basically, because of the increase in the cost of diesel, about 54% in the period, fertilizer at 42%. And our estimate is that the cash cost for ethanol will be close to what it was during the year, the year-to-date, 2.6 and 1.8% for sugar per ton. The cash cost goes up more than ethanol because of the freight expenses and the expenses to place sugar at the Board. These expenses are higher than last year. And here, you have the pie chart with a breakdown of the cash cost came to 37%, Labor '18. There was 12% negotiation -- labor negotiation, SG&A, and these and the others I have already referred to.
Now we have the company's indebtedness on the next phase. We closed with BRL 4.2 million net debt, net debt EBITDA, EUR 1.37 million. We had a variation of 45% because of working capital here, 1.8% as there was an increase in the cost the cost of gain will inform the cost of the product over the BRL 45 million in investment expense and improvement CapEx, cogeneration, and the corn plant and other investments, the corn stock, we already have our warehouses full of corn in order to start the next harvest in January with a plant in full operation.
So we have already applied this corn, about 60% of the hub is more or less dividends paid in the period. And we closed the year with 4.2%, as you can see on the last column. We have a very long debt, 5.4 years on average, only 20% of our debt is short-term, and the remainder is long-term. In our indebtedness, 92% is CDI-packed. Let's see the head evolution of the company. 6 months, our average price of sugar was close to 2,000 on cane and Corsicana.
Given the history of hedge that we had, the head of our own cane was something close to 10% lower than the Corsicana. And we expect that for the next half year, we may go to a price close to the Corsicana, which is close to 2.3. And for the next one, we have already hedged at the date. We had over 70,000 tones, which gives about 40% of our own sugarcane for next year, supposing we crush the same amount of sugarcane that we are pushing this year, and this should go up. But for calculation purposes, supposing the same percentage, it would be about 40%. Sugar on the screen, the price is 14% higher, and if this premium remains, we should have a more sugar harvest from today until April. We have a lot of time still to make this decision about that.
On the last 2 slides, just to finalize the presentation. With what I have described regarding production, we have updated our guidance in the 1.4% dropping in crushing 20 million tons of sugarcane. This is due to a combination of the own sugarcane and also in the third party. And this is the reason why we will be pushing less and TRS dropping 2.7% vis-a-vis the guidance because of the rainfall, and that was concentrated in September. We had a very fast deterioration in the curve of the TRS. And ultimately, for the up-to-date, we will be having this drop. And ultimately, we see 2.7% less trade vis-a-vis our guidance. We should be closing the production of sugar of about 1.2 million tons on average, a sugar maximum of ethanol and 900,000 ethanol. In ethanol, more or less 55% of the volume is hybrid, and the remaining is hydrous, mainly in the body unit.
And lastly, looking at the last slide, we have reviewed our CapEx estimate. The increase was made in modernization at expansion because of the projects. The first one is an irrigation project that will be irrigating about 20,000 hectares of sugarcane in Sao Machine plant of our own land, and we will have a very quick return in this project. This irrigation is very important because this is the reason why the CapEx is low and the return is high because it's our own land, and we also approved another project for hidroethanol production in Sao Paulo. And as of the next harvest, the company decided to have a more sugar mix. Or will -- if we do that, we will have 100% in hydrous and only Gas will be making a hybrid. So basically, it will be around 1.2 billion liters next year, and we will be starting the ethanol plant next year. Only 450,000 will be high covenant ethanol for the domestic market. And this reduced the volatility of prices in the domestic market. So we do have room for this decision if we have the situation that we had this year. So these were my initial remarks. And now I would like to open for questions.
[Operator Instructions] [indiscernible] Bank of America.
We have 2 questions here. The company increased exports having about 40% of the volume. Looking at the next few quarters, will you be keeping this level of exports? And the second question in relation to the CapEx. We saw the additional CapEx that you mentioned. And I would like to understand when we look at the execution of the CapEx, do you have a timeline in terms of the disbursements that will be necessary for these projects?
In relation to the ethanol exports year-to-date, 173,000 cubic meters of ethanol between hydrogen and hydros ethanol, and our estimate is that we will be totaling an additional 95,000, which would be around 250,000 cubic meters of ethanol. Proportionally speaking, we will have the 900,000 that I will be producing, and something close to 27% and 28% in exports and exporters here occurred because of the window that we had and we have a lot of our own sugarcane with good volume of certification, so we can guarantee an additional 95,000 for the next few quarters. For the next 2 years, this will depend on the market. It's very difficult to make any kind of forecast right now. Because in the previous year, this didn't happen. It was lower -- and ethanol is increasing because of some restrictions for the production of ethanol in Europe.
So we are prepared to take advantage of this window of opportunity in the domestic market, causing dropped quite steeply, the same as the product of gasoline because consumers went more towards gasoline than ethanol, and this was where we had this window for exports. It's very difficult to forecast what will be happening, only in the next semester in the next half year, we will be able to do that. In relation to the CapEx, the timeline is that we should be doing this up to March. The plant will be ready by March, so that we may operate and so production and irrigation as well. It happens right in the middle of the harvest. So we have to have the investments ready and made so that we may irrigate in the middle of the harvest and corn and the plant will be ready. So this will be spent up to April.
Just a follow-up question. In irrigation, are you going to buy the equipment?
We will be using our own [ Vinas ] channels. So this [ Vinas ] channel is already in place, and this is where we will be putting the water for irrigation. So the irrigation -- that will be done -- will not be the drop by drop irrigation.
Daniel Sasson, Itau, BBA.
Good afternoon, everybody. Thank you for the questions about taxes on fuels in the domestic market. What about your frame of mind regarding PLP 18 -- what do you believe will happen at the beginning of next year with a change in the federal government, -- do you have any expectations regarding a timeline, for instance. It would be very interesting to learn what you're thinking about that.
My second question has to do with the corn ethanol plant. Could you give us some color about the development of the project. And let's say there is an additional drop in prices in the domestic market. Let's say, the fuel price policy is not backed to the international prices. What will be your expectation regarding the profitability and the IRR for this project?
Daniel, thank you for the question. I will start by the second one. As we are starting to commission the corn ethanol plant now in November, it will be fully operational in January -- and in relation to the profitability coming from this plant, this plant has a combination of hydro ethanol, a very low energy consumption, only 60,000 megawatt-hour. And with the volume of production of oil, which is very high, the PGS is around $1,500 per ton, and that would be $150 million. So when you place this as a cost reduction factor in order to check the cash cost of the plant, the plant has about BRL 70 cash cost, which is very low. It is one of the lowest cash cost of ethanol that I have. With that, we have a very big buffer regarding the decision to operate the plant, should the prices go down. We believe that the ethanol price around 2.6% to 0.8%. It has a return of about 15% per year. I don't think prices will go down much further than this.
But it will be very difficult to stop the plant because of prices. Evaluation -- going back to your first question, it is very difficult to do any gas work about taxes for next year. There is a debate going on at Congress about the budget. It's a very complex debate. And we have to wait and see what the decision will be on the part of the government. But the good news is that President Lula has only defended ethanol since his first term of office. He understands the importance of ethanol for Brazil and for the world. So -- but let's give a step back and wait because this is not under our control.
The only thing that we can control is our company, our operations, our costs, but prices, well, prices, you have the market giving the cards, and we are starting an additional flexibilization may be producing a little bit more sugar for the 25%. But anyway, I would rather not say anything about that because we have to wait for the decision made by the government. Thank you.
Leonardo Alencar, XP.
I would like to make a follow-up about the ethanol and the CapEx. You're talking about production of anhydrous and the exports, what about exports? Do you have anything scheduled or programmed for the store at the Board, for instance? Will you be having more volume from third parties?
And something I would like to understand a little bit better the CapEx that you have in irrigation that you were talking about. What is the expectation of improvement in productivity with this irrigation? And we will be investing more in other regions as well after this one?
Thank you for the question. I would like to start by the second one. Our estimate is that with irrigation, we will have 10,000, 15,000 tons more in this area because it is inversely proportional to the amount of rainfall in the year. A year like this one, a very dry one. Let's say I had the operation of irrigation already. I would have more. But in a normal year, it will be from 10% to 15%. This irrigation plan is only for Usina São Martinho, the São Martinho plant. And we intend to expand it to Santa Cruz and Boavista, but the CapEx will be higher because this technology that we are using now, the use of irrigation to the fines infrastructure that we have will be more expensive in the other areas. But depending on the results, we will be able to do this in the next few plants.
Let's wait for the weather conditions to go back to normal. Let's wait for us to have good rainfall, and October was on average. It was according to the average or within the average. And if we have enough rainfall, we are not going to need irrigation. Irrigation is only necessary when you have an abnormal condition, such as we had in relation to the export of ethanol. In fact, the investment in hydro that will be made will lead us to produce more at São Martinho.
And maybe in the interval period maybe we will be able to transform more hydros into anhydrous and because there would be a real option to do a dehydration during the intercrop year producing more in hydros. And this year, we didn't have to invest anything in terms of storage. You organize our logistics to deliver ethanol for export, and it went straight to the board, and there was no additional expenses regarding storage.
Gabriel Barra, Citibank.
Two questions. When you look at the yield you have revised the guidance for production. And could you help us think about the next few years, how do you see this productivity in this harvest vis-a-vis the CapEx, and also we have an increase in CapEx to correct potential products or problem products to increase productivity?
And the second, the company has a very low indebtedness, a very low leverage and with uncertain scenario for the sugar situation. And also for ethanol because of taxes and pricing policy. So how are you thinking about investment and capital allocation for the next year? And also a very fast follow-up about your exports. What about the export premiums? You have more focus on anhydrous to depend less on the domestic market. So maybe you could talk about this premium for the export market so that we may think about the next harvest vis-a-vis ethanol prices.
Gabriel, thank you for the question. The first question about yield, -- for the next harvest, there is no additional CapEx that has to be made in order to increase yield. Usually, CapEx is in the previous harvest during the crop treatment and irrigation in this case. And we have already done it now. So this is the reason why our CapEx was high. We have to correct the soil and many other things. And for the next year, this is not going to happen unless we have a very exceptional weather situation, which is not something that we are counting on. So next year, there should be no news about CapEx beyond what we are talking about here.
In relation to yield estimate, if summer is normal, if we be going up 5% to 10%, this is the range. In a best scenario -- the best case scenario, let's say, we have a lot of rain during the evening and during the night, and a lot of sunshine during the day, which is the necessary combination, we could go up to 10%. This happened from '16 to '17, I think. You can look at the yield curves. And we had a 10% increase and our sugarcane plantation is ready for that, but it will depend on the weather conditions, a lot of rain during the night, and a lot of sunshine during the day.
And with this kind of situation, you have a lot of very big increase and the server range will increase the size and the weight of the sugarcane, and this leads to a better yield. Our goal for the next 2, 3 years is around 24 million tonnes. Everything is prepared for that, but we will depend on this weather situation that I described. In relation to your second question about exports and premiums. As I said before, -- we really don't know what the premium will be for the next year. This year was outstanding. Very good. And part of this premium was because the price of the domestic market dropped steeply. Let's say we didn't have the steep drop in the domestic market. Exports wouldn't have been as high as they were.
So it depends on the tax issue, but the project that we did has a return of about 20%. Even if I place anhydrous in the domestic market at historical prices, anything higher than that means a relevant improvement in the returns. You talked about the definition or a possible change in the pricing policy. And because of that, we do not have major projects and we have a project to the Santa Cruz unit, and the CapEx will be BRL 180 million. And during 2 years, to have it ready up and going around 2025, only this one. And this is also relevant. Whatever we have left in cash, we will be paying out dividends. And we are selling this change in mix to produce a little bit more sugar in some of our units.
But so far, we do not have an estimate for CapEx or for returns. We will try to minimize our exposure to the domestic market as far as ethanol is concerned.
Thiago Duarte, BTG Pactual.
Two additional questions about your CapEx guidance for modernization and expansion. First, of the BRL 220 million more that are included in this line for the current harvest, how much is for flexibilization of anhydrous and how much is for the irrigation project at São Martinho, the first clarification.
And the second, how much additional potential do you have for anhydrous coming from the flexibilization of your sales? I don't know if you can quantify how much more in hydrogen will be able to make. And also, I have a question about the remark that you made about the room that you have of 5% to 10% to increase yield. I'm not sure whether it's a little bit too soon to talk about that. But how much do you believe that with the increase in crushing, around 5% to 10%, how much do you think will bring down your unit cash cost considering a lower price of diesel and fertilizers that have been dropping? So is it too early to talk about that?
Thank you, Thiago. In relation to the breakdown of the CapEx, about BRL 60 million will be for the industrial part to make more anhydrous and the remainder will be for irrigation as I mentioned. On the anhydrous site, we can make an additional 80,000 cubic meters. If you look at the sugar mix approximately or more 160,000 if we do a more ethanol mix, this is the order of magnitude that we can do with this CapEx. In relation to costs, if you look at 7.5%, we should be reducing our unit cost by about 5% for next year. There are some other cuts. Although fertilizer cost will be dropping next year. Labor has recurrent inflation and also agricultural machinery. We do not see any drop in prices.
And we have to wait and see or waiting for a stabilization in the price of agricultural machinery. But in this comparison, it should be booking an additional 5%. This is the order of magnitude that we are considering super clear. Another follow-up with the start-up of the corn plant in mid-November, do you have an asset or a ballpark figure of the amount of corn you will be able to crush still in the '22/'23 harvest? It should be equivalent to 3 months of production. We are talking, well, not necessarily sales of ATG because it takes longer to reach full productivity.
And we have to test with the clients first because they have to take the quality so that they start to play their orders more than 20,000 from January to March.
[indiscernible], UBS.
About your hedge strategy, Felipe said a lot is yet to happen, but maybe the price is a little bit lower than the past harvest. Looking at what you have been doing historically, are you going to follow the same strategy or are going to wait for a potential return of taxes and the energy policy to be established by the net administration? And what about the impact of the tax benefit and the tax credits that were approved recently, when will they materialize and how will they materialize, both the state and federal credit and the impact on the company's results?
This is a benefit that the federal government transferred to the states regarding the ICMS tax. And this has already been posted to the result. The figures that you see for the second quarter already include BRL 45 million in the company's results coming from that -- from this credit. So it's already posted to the results in this quarter. Our results would have been worse if it were not for that. So we have a very recognized that and we receive over the next few quarters in order to -- for this to materialize as cash. Your third question regarding our hedge strategy, we expect that in December, we may have at least half of the next harvest already hedged. This is our initial estimate, and the fact that we have not accelerated so much, it's because of 2 things. We cannot really recover a lot in the next year given that the costs have gone up steeply.
Most of the players, in our opinion, have not made investments because of shorter cash free. Even having a more normal weather, there will be no major impact on the production of sugarcane. And second, we see a very squeezed sugar market coming from the fact that India is gaining speed in terms of ethanol production there, and they should be removing more sugar from the market and further reducing sugar exports from India.
So we see this at a very good level for us. But we believe that up to 50% up to December should be done because of the company's policy. This is what we expect in the next few quarters.
[Operator Instructions] Peter from [indiscernible]
Biogas Synergy, how do you see these projects? Any news about diesel replacement?
We have a cogeneration project. São Martinho was approved in 2019. And this project, the plan should be concluded, all the boilers should be ready by July next year, then the plan should be started up in August and so more cogeneration next year and for 2025 on. São Martinho would be going up to 1.2 gigawatts of energy in cogeneration. Besides, it will be -- it will depend on the price of energy and options to check the profitability. So they have the possibility of placing the cogeneration in Seating and taxes as well, but it will depend on prices.
The last time we checked in order to have a reasonable return, it would be necessary to have BRL 280 per megawatt hour, very far from what the previous auction was. In relation to the biogas, as I said, we are starting at Santa Cruz to do the Biogas project, [indiscernible] and part of the bio methane biogas environment 5 of this bio methane should supply about 20% of our fleet, mainly trucks.
So there is a degree of attraction because it replaces diesel. When car companies start to produce bigger tracks and higher torque and harvesters that may run with bio methane. This shouldn't lease our project in the other unit. For the time being, we are talking about Santa Cruz bio methane, that should be sold at a replacement of gas as a nonrenewable carbon source.
[Operator Instructions] And there are no more questions. I would like to turn the floor over to Mr. Felipe Vicchiato. Thank you very much.
Our team and myself will be available to answer any questions that you might have. We will be reporting the third quarter in mid-February. As I said before, sugar prices should be better and part of our hedge is in longer screens. The cost is already bought. That is to say, it shouldn't go up a lot, and we expect better results for the next 2 quarters. Thank you very much.
Thank you very much. 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.