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. 4Q '18 Earnings Call for '17/'18 crop year. Today with us, Mr. Felipe Vicchiato, Chief Financial and Investor Relations Officer; and Ms. Aline Reigada, São Martinho's Investor Relations Manager.
Audio and slides for this presentation are being simultaneously broadcast at the company's website, www.saomartinho.com.br/ir. [Operator Instructions] We also would like to inform you that data provided in this call represents forward-looking statements about future expectations, therefore, subject to known and unknown risks and uncertainties that could cause the company's actual results to differ materially from those expressed in these statements.
Now I would like to turn the floor over to Mr. Felipe Vicchiato to start the call. Thank you.
Good afternoon, everyone. Thank you very much for participating in this conference call regarding the results of the fourth quarter of crop year '17/'18. Let's start the presentation on Page #3 with the main topics. We will talk about operating highlights of the crop year that has just ended, financial highlights for the company for the quarter and the year. We will talk a little bit about São Martinho's costs, how costs have behaved over the quarter and throughout the whole crop year, indebtedness as well. And then we'll talk about the production guidance for crop year '18/'19 just published today, and the size of the shortfall and why we have a crop shortfall. We'll talk about hedge and dollar and then the ethanol scenario ahead.
Now turning to the next slide on Page #4. We have operating highlights for the crop year that we just closed '17/'18. The company has crossed 15% higher of sugarcane, 19.2 million to 20.2 million tons, a mix of 53% ethanol and 47% sugar, producing 1.4 million tons of sugar and 487,000 cubic meters of anhydrous and 466,000 of hydrous, an increase of 22% of anhydrous and hydrous an increase of 73%. The main reason why we have increased the production of ethanol, anhydrous and hydrous was the total concentration of where these assets were. The conclusion of the transaction, where Petrobrás happened in February of last year, and so we consolidated fully the results and the current crop year.
Now turning to Slide #5. We have financial highlights that show the result of the strong product and production volume in this crop year. In the fourth quarter, we have an increase in net revenue of 25% because of larger volumes of ethanol sold, which was 84% higher than the first quarter, with an average price that was 4% higher than the first quarter. For sugar, we increased the volume in 5.6% from 374,000 tons to 394,000 tons. But the average price of sugar in the quarter had a drop of 17% approximately, reaching BRL 1,100 per tons of sugar sold once the prices of the commodities at the end of the quarter have dropped considerably reaching $0.12. Even with the bad prices for sugar, we were able to have a record margin of EBITDA in the quarter, 52.4% vis-à-vis a margin in the prior year of 44.8%. We have a growth of 7.5 percentage points. We should remember that in the last quarter, we had almost nothing in terms of selling energy generation and this is the first time that São Martinho has a margin of over 50% in this quarter without energy cogeneration.
In addition to a price improvement of ethanol and also improvement in volume, we have a better direction of fixed cost in the quarter, when we compare that to the crop year of '16/'17, and obviously, the full integration of Boa Vista, which, as you know, that has a lower cost -- lower than the average of São Martinho's group. So the EBITDA increases 46%, adjusted EBIT growth 62%. We have a net income before taxes from -- going from BRL 248 million to BRL 192 million, a drop of 22%. And that drop is mainly explained by nonrecurring item that we had in the past year a gain of BRL 140 million because of Nova Fronteira integration and the transaction with Petrobrás, and also, the mark-to-market of the biological asset in this quarter, which we have posted a loss of BRL 50 million because in March of 2018, the sugar prices on the screen were close to $0.12, and we have to adjust the mark-to-market of those biologic assets based on when we close the balance sheet.
Net of this nonrecurring events, we have a reconciliation of our cash or income cash in Table #2, and we see that, the net income has -- the cash income has increased 102%, from BRL 140 million in the first quarter to BRL 233 million in this quarter. This is an important comment now about the year. We have here, on the Graph #2, the behavior of the average price of ethanol and the volume of sales throughout the year. We had a drop if we compare year-on-year crop year of '16/'17 and '17/'18, a drop in the average price of ethanol from BRL 1,773 per cubic meters to BRL 1,728 per cubic meter. So that's a drop of 2.5%. But if you compare the average price realized by São Martinho to -- as our equivalent, we have a gain of almost 9% that is higher than [indiscernible], and we have that premium because of the carryover strategy of the company. And we will try to implement that strategy, once again in this crop year so that we can have a premium equal or better than results. In the sugar and despite of the strong price increase and the variation throughout the crop year, when we compare the average price of sugar realized year-on-year, crop year '16/'17 and '17/'18, the average price for sugar has increased only 3% and volume only 5% of sugar sold. So even then with the average price going up a little bit, we were able to have a margin throughout the year that was still relevant.
Now turning to costs of the company throughout the year and in the quarter. This is on Page 6. Here, we have a chart in our financial statement that shows the cash cost of the company, both for sugar, ethanol and energy. I think that all of you that read the release were able to understand the cost. Basically, we ended the fiscal year of crop year '17/'18 with an average cost price for sugar close to BRL 926 per ton, that cost today is close to $0.11 for sugar if we turn that in cents per pound. We have sold sugar at BRL 1,290 per ton. We have an operating margin of 28% that would be a cash margin before financial expenses in sugar. And for ethanol, we follow the same rationale. We had a cost of BRL 1,400 per cubic meter. We have sold BRL 1,700 in average, and we had a margin in ethanol close to 19%, and in energy, a margin close to 82%, both in the quarter as well as in the year. The improve of the operating area of the company greater production of ethanol, better TRS almost brought down our unit cash cost -- brought it down both in the quarter as well as in the year. You can see that for the year, the unit cash cost for ethanol comes down, for ethanol 13.9%., for sugar 13.6%. And in the quarter, it's even greater because the quarter, when compared that to '16/'17, was a little bit worse because there was the impact of the crop in the fourth quarter of the crop year '16/'17. So this is a summary of the costs of the company. So we expect to be in the same trend for the next crop year trying to bring down as much as possible the operating costs of the company.
Now turning to the next slide. We have the indebtedness of the company. We ended with a total gross debt of BRL 3.9 billion, a cash of BRL 1.5 billion, net debt of BRL 2.4 billion. And when we analyze indicated net debt to EBITDA, it was at 1.26x, very low level. I think this is the lowest all-time average since we went public. Year-on-year, there is a drop of 18.7% if we compare that to 1.55x net debt EBITDA closing in March '17. For net debt -- now gross debt -- 74% -- of the gross debt, 74% of that is in reals and 26% is in foreign currency. And for our net debt, 37% of the net debt is in dollars and 63% of the net debt is in reals. And Graph #2, we have the movement of the debt, the net debt and what has contributed to the increase or decrease of the debt. The debt schedule is healthy. We have a cash of BRL 1.5 billion for a debt that we have BRL 700 million only and a debt that has a maturity of 2 to 3 years. So that cash really covers almost 2 years of maturities and financial debt. And yesterday, we published that we are now taking more BRL 50 million to be paid in 50 years to extend a little bit more the company's debt. And probably, now in June, when we disclose the results, you will see an indebtedness that is still more extended and at lower costs of financing.
Now turning to the next page, Page #8. We have our estimates for production for crop year '18/'19, the guidance that we have published this morning. São Martinho expects to cross 20.5 million tons of sugarcane, that represents 7.4% drop vis-à-vis crop year '17/'18. The initial estimates of the company that started being built in September of last year estimated a figure that was closer to 23 million tons. And the reason why we are crushing 20.5 million tons is that there was a draught significant in the past months. Even throughout summer, the rainfall volume was hurt. And this is the main reason why we are just crushing 20.5 million tons. In addition to the drought, we took that strategy of increasing the planting area, decreasing the harvesting area, that is to expedite our growth project to crush close to 24 million tons. Therefore, we did have an impact in the guidance as well. But the main impact was the drought that we are seeing -- that is happening in São Paulo and even in other regions. As all of you can see, we -- I don't think we have had any rainfall since April. And despite of that, we are providing a guidance with 65% of that sugarcane for ethanol production and 35% of that sugarcane for sugar production. Therefore, the volume of produced sugar will come down year-on-year 30.4%, and the volume of ethanol produced, when we add hydrous and anhydrous that will increase close to 20% and hydrous should increase over 40%. So this will be an ethanol-based crop year. And most of that sugar production, and we will talk about that in the next slide that's already hedged at a very interesting price level. And the idea is that within 2 or 3 years, at the most, the company will have a crushing volume close to 24 million tons, which is effectively the industrial capacity of the 4 plants that we have.
Now on Page #9, as I have said, we have our hedge position for sugar. For March 31, we had hedged 535,000 tons of that product, that's USD 15.51. That price is an equivalent in reals for the parts that already hedged in reals represents BRL 1,144 per ton and that represents 78% of own sugarcane and 54% of our own sugarcane only analyzed the volume of sugarcane in reals already locked in. The reason why -- so far we don't have 100% of the dollar of the volume of sugar already locked in, it was because, at the time, we understood there was -- it was going to be positive to have that mismatch. At the average, we are locked in at BRL 3.35. Today, the dollar is close to BRL 3.80. If we analyze that position, we probably will have sugar at BRL 1,180 per ton as well as the whole crop year, which is very good for a year and the prices where we have seen sugar reaching to $0.12 very recently.
Well, now turning to the last slide. We will disclose a little bit about the ethanol scenario. This is the main bet of the company. This year, once we'll be producing 65% of sucroses, we'll be destined to -- ethanol, today, UNICA published a report. And we see that there is a production volume that is important for ethanol in the midwest -- in the mid and central. So São Martinho is migrating to ethanol production. And I think in the year-to-date, that production has increased 50% vis-à-vis last year. On the other hand, the sugar production, the kilos per sugar, processed sugarcane tonnage have dropped. So we should have a sugar production in Brazil much lower than what we have seen in the past year. It's difficult to define a figure, but we are close to 28 million tons of sugar. And there are some other producers at 30 million tons, our figure is close to 28 million tons. In the ethanol scenario, we see a positive outlook. Today, the parity in the main markets, which are São Paulo, Goiás, Minas Gerais is between 60% and 64%, the parity, I mean. So it's good for consumers to use ethanol instead of gasoline, and that maintains the demand for this product very high. And the year-to-date of the crop year, we have demand for ethanol increasing 12.6%. And São Martinho's strategy is to sell ethanol, is to have the carryover, as I mentioned, to sell 35% of the volume in the first half of the year and 65% of the volume in the second half of the year to try and capture a premium higher than as output as we have been doing historically in the past years.
Well, these were my initial remarks about the quarter and the year. And now I would like to open the floor for Q&A.
[Operator Instructions] The first question is from Isabella Simonato, Bank of America.
I have 2 questions. The first, Felipe, about Copersucar deal and the government and IAA. I read the release and it's clear that the first BRL 5.6 billion you have already been able to issue the placatories, and you might be able to issue the next one soon. So you will have an annual cash income of something close to BRL 400 million in the next coming years. Is that correct? And where are you going to direct this money to, in case you get all this money? That's my first question.
Isabella. Good afternoon. Well, one of the placatories has already been issued. And the first installment has already been deposited, that's the judicial deposit. And Copersucar is trying to turn that judicial deposit into cash. But the second placatory note has not been issued yet. Copersucar has already requested that it should be issued. The federal government has -- says that the amount is a little bit lower. So in order to know exactly what is the amount that will have coming into the company's cash, we need to know when the second placatory will be issued. So we don't have that control here, but as we have shown in the release, basically, this is a copy of the same explanation note that Copersucar added, and that's also one of the reasons why we brought that to our results. The situation is very close to happening, yes. In terms of using that money, we don't have major projects to grow the company. We don't have brownfield projects because the brownfield projects are not feasible financially that would be double Boa Vista Mill. So as soon as we have that cash, we'll distribute dividends or to increase the buyback, share buyback, program. But we first have to wait for that cash coming in. We have to check all physical aspects because on top of that cash coming in we have to pay taxes on that, and so the net of it we probably will be paying our shareholders.
It's very clear. Second question about the guidance for this crop year and also the margin. You mentioned in the release that you are looking at results that are very similar to '17/'18. What about the unit costs for this year having this volume that is 10% lower? What can you do internally to offset that in terms of the unit costs?
The volume is not 10% lower, it's 5% lower only. If you look at the last line that represent TRS equivalent, we are losing 7% in crushing and we are getting 2% in the TRS. So there is a gap of 5%. In addition to that, we turned the quarter with an ethanol and sugar inventory that is relevant considering our history of turning the crop year. We were close to 78,000 to 80,000 cubic meters of ethanol and 30,000 tons per sugar. And that ethanol has already been sowed in April, and it was already priced in March. So it was just a matter of just going from 1 month to another that we were not able to invoice it. And the sugar was also priced. So when you combine the produced volume, 5% less than that, inventory that went from 1 month to another, it was transferred from one month to another, we understand that the volume will not be hurt. If you look at sowed volume of the company, when you compare it to the prior year and the cost impact of 5% less production, it is not that relevant. We, with our own internal initiative, we can improve the yield of the combining machines, the diesel consumption and we can really work on that lower production of ethanol and sugar.
Next question is from Victor Saragiotto, Crédit Suisse.
Felipe, I want to ask about the direct sales, ethanol from the mills to distributors. What is the position of the company? How do you think that could hurt or improve the market? And also, related to renewable, what do you think about that?
Victor, thank you very much for your question. Well, São Martinho is in line to UNICA's position, and UNICA is talking about the approval or not of that loss. So we are working in line with UNICA. But if this is approved, it is -- it was an urgent law, but now it's no longer. But if this is approved, we will have to adjust ourselves and to be able to get some benefits from that within the company's assets. So the 3 mills in São Paulo are in the strategic areas close to a high consumer market. Goiás plant has a large volume of ethanol production with a carryover that is very efficient. And if the law is approved, São Martinho will work and study the possibilities, understand if it is worthwhile or not to sell part of the production directly to gas stations. And it's good to comment that -- we have possibilities. This is not an obligation. So if at the end of our understanding, if we believe that we should not sell straight to gas stations, we will keep our model of selling through distributors. São Martinho, in the past, has had some studies to try and understand if it will be worthwhile to go forward in the chain and have a distributing company, and we saw that it was not worthwhile because then we would need scale and other types of expertise that São Martinho does not have. So that was the idea, not building and not buying a distributing company. So if the law is approved, we'll analyze it. And always, we should remember this is an option, not an obligation. About renewable, I don't think it's going to change too much. The volume of ethanol that we sell for the distributors and the law of renewable was still there, and the volume of ethanol that by any chance I sell is straight to the gas stations. I understand that, that would not have another deal. So that would be a tradeoff. Each company has to analyze and then see if it is worthwhile selling straight to gas stations or not.
Great. And then second question. Now going back to Simonato's question. In a potential reduction in your crushing, so how do you see the breakdown of your own sugarcane and third-party sugarcane? Because I don't know if you have an idea of how that's going to be in the future.
Well, for own sugarcane and third-party sugarcane that makes a [ lot ] of change. It will be close to 70-30, but the cost pressure would be that in practice, I have less amount of sucroses per ton of sugarcane because I have less TCH. So the fixed cost dilution is a little bit worse, but that's not very relevant. If you get the total cost of the company, the cash cost of the company that we disclosed in the release and divide that by the produced volume in the crop years, '17/'18, '18/'19, you will see that the difference is not that great, probably I will have a cost [ 19 26 to 19 50 ] per ton of sugar, that's not as relevant. And for ethanol, because I'm producing more ethanol, probably I will have savings. If I add more sucroses to ethanol, I will have fixed cost diluted and maybe ethanol will have the same cash cost for production that I'm reporting now. So the cash cost for ethanol especially should not change for the next crop year.
Next question is from Thiago Duarte, BTG Pactual.
I have 2 questions. The first one, you're talking about the next crop year, and I would like to understand the CapEx figure that would make sense to work with for this next year, considering that breakdown that you have of maintenance, improvement and expansion, I would like to understand that. And in the same context, that news that came out last year of sugarcane acquisition by Furlan group, Santa Barbara mill, if I'm not mistaken, if that is already considered in the sugarcane acquisition context. And second question, going back to the credit notes, the placatory is, just to understand, Felipe, in that cash that's already in judicial deposit, I would imagine that for a moment this will be São Martinho's cash, and also, the next credit notes also will be in your cash flow. How can you think about not resources? I don't know if you already know what will be the taxation of that money. If you can give us an idea, I would appreciate.
Thiago, thank you for your questions. About CapEx, we estimate that in the next crop year, we will have a CapEx, maintenance CapEx, of BRL 930 million. Basically, we shouldn't have a crop year that is a little bit shorter. And we have increased a little bit the planting area, so we will have a planting CapEx that's a little bit higher. So this is BRL 930 million. And if you analyze operating improvement and other projects, [indiscernible] and other smaller projects, we will have BRL 100 million to BRL 120 million of CapEx for crop year '18/'19. In that CapEx, we are not including any sugarcane acquisition and no mill acquisition. If there is an acquisition, that CapEx figure is not contemplating that. But obviously, the CapEx will be involved and sugarcane will be involved, so that we can process that took sugarcane and then we would have the return on the investment as well. So that is the breakdown. Now about taxes of the IAA, taxation, we will follow what Copersucar understands is right. Probably, Copersucar will collect the taxes and deposit the taxes judicially as well and then discuss in court if those taxes are really due or not. Or if they are not due, maybe it's because of indemnity matter. Because once those funds would have to be paid to the mills in the [ areas ] and now this is being paid. So Copersucar lawyers understand that the taxes should be deposited judicially as well and then that should be discussed considering this is a compensation then -- that's really a compensation, and if that's the understanding, taxes are not due. But to make a long story short, the funds will go into São Martinho's cash net of taxes and after Copersucar and lawyers, if they are successful in that cause, then those funds that would be in the judicial deposit would be then transferred to the cash of -- to the accounts of the company.
Next question is from Thomas Budoya, Itau BBA.
I have a question about the draught in the beginning of this year. Do you have already contracted impact for the rest of the year? Is it too early to know anything about that? If -- and also, if the draught has a factor that it has delayed planting in the beginning of the crop year and if you are concentrating that later on? Second question is about distillery, in the past when sugar prices were very high with a premium for ethanol at Santa Cruz, they were able to do an adjustment. There was a marginal CapEx to increase the sugar production. Do you have anything regarding ethanol now? The industry is talking about acquiring brownfields that are not working, and if São Martinho has any analysis regarding that?
Thomas, thank you very much for your questions. About the draught, so far, the next crop year, '19/'18, we don't have an impact so far. And sugarcane growth happens from October to February and March and that's 85% of it. And we believe that so far that's not been -- we don't have an impact for the next year. Just this year and the impact for this year, that, that effect was already considered in our guidance disclosed to the market. São Martinho usually takes a little bit longer to release the crop year estimate so that we can better understand the sugarcane growth in June. We have a sound basis, so that we can know more about that figure. About planting, there was no impact in our situation. We planned with that technique of [indiscernible] that is done between January and March. So between January and March, we have rain not in the all-time average, but it did rain. And so it had no impact in the planted area. On the contrary, we planted even more, and that's what I said in the beginning of the call. That's why I'm harvesting less areas than what I have harvested last year. I don't know if I missed another question, but those 2 questions only, right?
Yes. Just the last one about distillery, if you have a marginal CapEx?
For distillery, we are analyzing that possibility to see if there is a bottleneck there. A bottleneck that we could remove and produce more ethanol. And that's not the case, and then we are -- maximum to any additional position would require huge CapEx considering the marginal position. So far, we are at 65%, and we are happy about this mix.
And a final question, if you allow me. Going back to Thiago's question. Acquiring and buying sugarcane from Furlan, can you comment more on that, please?
Yes. I have seen this piece of news. Anything required if that is about acquisition or buying, we usually issue a material fact, but we have no comments on that. We are analyzing the M&A in the segment just as everyone. But on the case of Furlan, I have no comments so far. Thank you.
Next question is from Marcelo Inoue, Citi.
My question is for hedge and sugar prices. You just commented that the prices for the crop year are close to BRL 180 per ton. And I want to understand, if the recent depreciation has already allowed you an opportunity to close a hedge for '19/'20 and at which level? And also, I would like to know if it's possible that for crop year '19/'20, you will do different from what you have done [indiscernible] to close the FX and to wait for the sugar to recover in cents per pound?
Marcelo, thank you for your question. We are accessing. We are analyzing if we should lock in the prices for '19/'20. The price for '19/'20 today is at a very similar level for '17/'18 close to BRL 1,180, sometimes even BRL 1,200 considering the combination of sugar price and dollar. Hardly, I believe that we will have a mismatch position, where I sell dollar first, and commercial area, we will sugar after that. We understand that this is a risk movement because Brazil was a marginal sugar producer and the FX depreciates quickly and the prices could come down even more. So if we are to do that commercial area, probably we'll work first -- we will do it first. And then we will follow that up with the FX or we would do a match transaction as we have been doing in the past year. So we are analyzing the possibilities that this price is increasing because we see that surplus of sugar in this crop year and then the next one because of the surplus production of India and Thailand.
[Operator Instructions] So now we end the Q&A session. I would like to turn the floor back to Mr. Felipe Vicchiato for his final remarks.
Thank you all very much for participating in this conference call. I think this crop year was challenging. There was a huge volatility in sugar and São Martinho was able to use its strategy, commercial strategy, both for sugar and ethanol and have a record result in terms of profit and operational result as well. So we had record cash in the BRL 150 million. Also shareholders compensation reals were recorded in this crop year. If we combine dividends and shares buyback, adding both of them, we are talking about something close to BRL 350 million to shareholders. And the idea is to have the same type of payout to shareholders in the next crop year. And that the next crop year will not be different, as I said before, and we will take advantage of this positive scenario and the ethanol prices. Thank you all very much. Our next call should be in the middle of August so that we can talk about our first quarter. And if you have any questions, my IR team and myself, we are available to address your questions. Thank you.
The conference call for São Martinho has ended. Thank you all for your participation, and have a nice afternoon.