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. Conference Call to discuss the results of the fourth quarter of the 2021 harvest. Today with us, we have Mr. Felipe Vicchiato, CFO and Investor Relations Officer; and Mrs. Aline Reigada, São Martinho's Investor Relations Manager. The audio and the slide presentation of this conference are being broadcast simultaneously on the Internet at saomartinho.com.br/ir.
[Operator Instructions]
We would like to clarify that some information conveyed during this call may be projections or forward-looking statements. And as such, they are subject to known and unknown risks and uncertainties that could lead the company's results to differ materially from those expressed in those forward-looking statements.
Now I would like to turn the floor over to Mr. Felipe Vicchiato, who will start the presentation. Thank you.
Good afternoon, everybody. Thank you for participating in São Martinho's conference call about the last quarter of the 2021 crop year -- at the end of the crop year.
Let's go to Page #3 with the main themes of our call. We will start with the financial highlights of the year, the cash cost for the year, the indebtedness of the company and the material information about the production guidance of sugar and alcohol -- sugar and ethanol market and CapEx for the year, given the projects that we have in terms of investment.
On Slide #4, we have a summary of the quarter and of the year for the quarter. We had 15% less volume sold when you look at TRS equivalent, because a early sale in the last quarter or the previous quarter and inventory of anhydrous ethanol for this quarter. And we are less sold than the previous one. For the year, the volume sold was 7% higher more sugar than ethanol because of the mix of the last crop, and we had a growth of 17% in the revenues for the year.
In the quarter, in spite of the lower volume sold, our revenue was in line quarter-on-quarter, given the better prices, both of sugar and ethanol, adjusted EBITDA dropping 2%. Quarter-on-quarter, adjusted EBITDA going up 1.4% and net income growing 45%. As you can see on the slide, net of cash income [ 45.4% ] and for the improvement of the net income in the quarter, we had a mark-to-market of the biological asset of BRL 45 million in the quarter.
As the prices of sugar and ethanol went up quite a lot year-on-year, and a lower volume of financial expenses because of the management of our costs and the lower variation of exchange that had this impact on the quarter. So the operating result is in line, and we saw an improvement in the net income because of these 2 lines.
For the year, we closed BRL 2.2 billion; EBITDA, BRL 1 billion with a margin of 23%; and cash income, BRL 996 million, 39.7% higher on a year-on-year comparison. And based on that, we announced that we have forwarded a request for our shareholders of our Board of Directors of the payment of interest on equity. With the BRL 121 million that we have already paid, we have BRL 420 million in dividend and interest on equity to be paid, due to the results of this crop year in mid-August, should the directors meet to approve it.
Then we have a summary of the cash costs for the year. We have the cash cost of 15% due to the increase in the price of the Consecana, BRL 131 million up. Including the effect of the Consecana, we were able to direct the cost and the unit year-on-year, and the cost of production of sugar went up to 6.4% and ethanol, 4.2% increase, already including all the effect of Consecana.
As you know, São Martinho today has 70% of owned cane, and we end up benefiting and reducing the comparison of the cost of production of sugar and ethanol when you compare to the other companies that have higher needs. And for the current crop year, we believe we will be increasing our production costs between 8% and 10% because of the increase in the diesel price year-on-year that went up close to 40% and the cost of fertilizer that is also going up around 25%. So these are -- and the company as much as possible is trying to dilute costs and dilute this both for diesel and fertilizers.
On Page 6, we have a summary of our indebtedness. Net debt, BRL 2.7 billion at the end of the year, in March '21, a drop of 6% vis-a-vis last year. Net debt-to-EBITDA ratio with a drop of 20%, closing at 1.24x net debt-to-EBITDA ratio.
And here, we have the net debt of the company. On the slide, we still have BRL 150 million in the working capital that we used in this year because of the carryover of inventory that we carried over from 1 year to the other one. But afterwards, the net debt will be dropping automatically, cash, BRL 1.3 billion in March '21, enough for 2 years of debt that we have a very small debt in the short run -- mature in the short run and all the investments that will be made this year, both investments in corn, in the corn mill and also in the boiler.
We have money coming in due to the long-term financing in order to cover these investments. So we do not have to take money from working capital or other line in order to make the investments. It was a very complicated year because of the pandemic, mainly the beginning of the year. And in spite of that, the company was able to maintain investment grade by S&P, one of the very few Brazilian companies able to do that, remaining investment grade of B- on a global scale and AAA domestically. We have 3.5 years average term of our debt, and that soon -- as we disburse the long-term financing in order to finance our CapEx of the company, this should be going up at least 1 year or 18 months as soon as this disbursement happens.
On the next page, we have the production guidance that was published yesterday with the material fact. Crushing, a drop of 8.9% drop vis-a-vis the last crop. Average TRS, at the same level of last year. And the reason why we are decreasing the estimate for crushing is because of the very dry weather from January to April. December, we had some more rain but after that, the weather was very bad. And this has a very big impact on the productivity of the yield of sugarcane, and we are hedging based on the information that we have today, the production of ethanol to the detriment of the sugar production. We had to make 1.2 million tons of sugar with a drop of 18% vis-a-vis last year and ethanol, 1 billion liters during this year.
We are producing more ethanol than sugar because of the good prices in force in the market today, at a very constructive market for the next few months, mainly in the second half of the year, October to March. And we believe that the price scenario, that is to say the demand, will continue to be firm. And São Martinho will be ready to cater to the ethanol consumers' cogeneration dropping 5% due to the lower crushing, probably with better prices of cogeneration, something between 15% to 20% to be sold in the spot market still.
And we added close to 51,000 of sugar and 84,000 ethanol. CBIO and here, most of the ethanol, 2/3, is anhydrous with a very interesting price, and sugar was already hedged -- sold here in April. So these are the initial estimates.
I don't think we will be seeing a major difference in -- because of 45% of the crop has already been crushed and we believe that we will be reaching the guidance according to what was informed. We have our hedge position for in the idea of ethanol prices that we are looking to the future for the '21, '22. 97% of our own cane was already hedged at BRL 1,657 per ton and 429,000 tons sugar. The exchange rate we should leave it open in order to pay our debt in foreign currency and supplies, fertilizers, et cetera, that have dollar prices.
For the '22, '23, we have 38% of our sugarcane already hedged, assuming the same production of sugar around BRL 1,800 per ton. And ethanol, as I said before, in the last few months going up in prices in the local market, given a combination of the higher demand and the better prices of gasoline. In turn, we have a price on average of BRL 3.2 per liter for the producer. And São Martinho is trying to do this year more anhydrous than hydrous because of the price in the spot market. And we believe it could reach 400,000 in -- of anhydrous ethanol, 330,000 would be hydrous from Boa Vista with the market dynamics and each region has a different market dynamic. If you look at the figures of São Paulo, we had more -- we are preferring anhydrous because it has a very big price advantage. And in some screens, it is even higher than the sugar.
And the idea in the market today is the price of anhydrous is higher than sugar. Considering the next few months with a lower lockdown and higher consumption, we believe that the price tends to stay at this level or even a little bit higher. So this is the rationale. This is the reason why we are producing more ethanol than sugar looking at the market today. But should the market change and, let's say, the price of sugar going up or -- of course, gradually, we will change our production in order to do more sugar. But today, the best estimate is that we will be doing more ethanol than sugar.
And lastly, before we open for your questions, we have a CapEx estimate for this crop year. Our estimate is to put BRL 1.3 billion maintenance CapEx. The total is BRL 2.1 billion. And the remainder is a combination of growth CapEx, which is basically the corn ethanol project and the -- and the cogeneration project in São Martinho in agroindustrial efficiency.
The corn CapEx should be BRL 450 million. We are talking about an increase of efficiency and also ERP for the investments of our automation project and a better reading of the data, thereby improving the efficiency of the company for the next few years. So these were my initial remarks. And now I would like to open for questions. Thank you.
[Operator Instructions]
Guilherme Palhares from Bank of America.
Could you talk about the hydrous and anhydrous mix for the next crop year? And what was -- because I know that this is changing over time. And the second, the BRL 1.3 billion for maintenance CapEx for the next crop year, you talked about some additional costs in fertilizers. But could you talk about the maintenance CapEx year-on-year, the comparison? And I would like to know exactly what is bringing about this increase?
Guilherme, thank you for the question. Your first question, in the last crop, we did 24% anhydrous and 76% hydrous. In this crop year, we intend to reach almost 40% anhydrous and 60% hydrous. I would like to remind you that hydrous, most of it is Boa Vista that has a dynamic for the remuneration of the product even better because of the -- better than the anhydrous because of the tax part, and anhydrous has a premium, which is higher by 13%, 14% over the other one.
And the cost in the BRL 1.3 billion in maintenance CapEx, which is basically plenty and treatment and the maintenance of the intercrop. We have a major part of that coming from fertilizers that are going up on 30%. The treatment -- the crop treatment has a major impact on fertilizers and the maintenance in the intercrop period. All the 3 have to do with labor, and labor should be going up by 6% or 7%, and labor accounts for 1/3 of our costs, including the cost of sugarcane from third party.
So the labor cost is very high for the company, and it should be going up about 7%. And when you look at the unit cost, net of the effect of Consecana for sugar, we believe that it should be going up between 7% and 8%, at least to reduce crop year, net of the effect of Consecana. But with the effect of Consecana, then the figure should be going up almost 2 digits because ethanol is going up and sugar as well when you compare the spot prices. So this is a year where I have better prices, but there is an important impact of cost, mainly the unit cost as I'm going to have a lower production as I'm having a lower crop, about 8%. So it goes up almost 2 digits because they have a lower volume produced and the unit cost, of course, suffers with that.
Have I answered your questions?
Thank you.
Lucas Ferreira, JPMorgan.
About ethanol, Felipe. How do you see the intercrop period? The last one had a very low inventory. And do you believe that the demand will be going up with a lower lockdown? And you have also the crushing volume coming into place. We believe we could see some crazy prices for ethanol, much higher than expected. And how are you preparing for this kind of scenario?
And my second question is, if you could see already consequences over or on the next crop year regarding the availability of cane, could we have a spillover? Could we have a spillover of the shortfall?
Lucas, thank you very much. I'm going to start by the second. The effect on the next crop year has to do with the cane that was planted, the planted cane. As we have not seen the necessary rainfall that would be necessary, there could be some effect on the next crop year. But if we have a lot of rainfall and if we have a good winter rainfall, there could be a degree of recovery, but the sugarcane that has already been planted will have an impact. That would be 15% to 20% of the sugarcane that will be harvested, and the first cut will have the biggest impact.
So you will see this impact, but it's very difficult to quantify that. I know that many mills were not able even to plant. The soil was already prepared. The land was prepared. They had already removed the old sugarcane to plant the new ones. But without the rain, some plants or some mills were not able to plant. And in the case of São Martinho, as our planting is very much with Meiosis, so we irrigate and we had no problem regarding planting. We planted up to April. But some of the other players were not able to do that.
Now answering your first question. This question of parity. 70% -- well, you see that the newer cars have -- the parity is not 70%. It is 75%, 76%. And we see that consumers already look at parity in a different fashion, and they look at the consumption of each car individually. We believe it will be a balanced harvest and everybody who is responsible produces ethanol to cater to the market.
So it will not be possible to have a shortfall of ethanol. And we see the market or the industry, they are not producing the maximum of ethanol or neither the maximum of sugar, and they will try to cater to the market according to the demand for hydrous and anhydrous. We expect, on average, that the parity will be around 75% and no longer 70%, first, because the cars are more efficient; and second, because you have a limited supply of the product.
Thiago Duarte from BTG Pactual.
Felipe, I have a few quick questions. In your guidance, Felipe, when you look at the TRS, it is in line with last year, and it was quite high mostly because of the situation of the sugarcane last year. So could you talk about the maintenance of this TRS? And the reason for that is the reason the same that came into play last year? And so could you explain to me this TRS around 146? And in the expansion CapEx that you mentioned, how much -- if you can break this down, how much -- how much goes to the ethanol, the corn ethanol project?
And the other question has to do with your CapEx, but the maintenance CapEx. When you talk about BRL 1.3 billion, does it have to do with the last year's value of BRL 1.26 billion? And it is a very modest increase year-on-year, considering the inflation of some of the inputs that you mentioned.
And the last question, going back to the discussion about the mix and the ethanol prices. Normally, when you give us the guidance, you already give us a range without locking in a precise number for ethanol and sugar. And now this year, you're talking about a very precise figure, and the mix could change depending on the market dynamics. So could you please tell us why you changed?
Thiago, good afternoon. Thank you for all your questions. Regarding the BRL 1.3 billion maintenance CapEx, it is the CapEx related to BRL 1.26 billion that we published that contemplates the treatment and planting at the means of the intercrop. And the BRL 1.26 billion was slightly higher than what we estimated first for the last crop year because it was the longer intercrop period. And when you have a longer intercrop period, what happens accounting-wise is that you launch it in the production, and you launch it or you post it to the maintenance CapEx, let's say, the cost of labor involved, I had less days of harvest. And because of that, I have more expenses in my CapEx because of the stand-over part.
And now I estimate we will have less days of intercrop. And if we do this per day, we will be seeing this increase of 8% to 10%, in line with the situation of fertilizers and the debt and labor. It has to do with the number of days of the intercrop period. And in the BRL 750 million, BRL 400 million to BRL 450 million is for the corn ethanol, UTE would be BRL 100 million of the cogeneration and the remainder will come to the other projects.
And you can see that, as you said yourself, it is higher than the average. The first factor that comes into play is the dry weather. Last year was very dry. And this year, it is again very dry. So when you have this hyperstress at this level, the cane concentrates more TRS, and this is why you see the same phenomenon and also because in some areas, we apply a technique, which gives us a better amount of sucroses. We applied ripeners.
And regarding the guidance, the reason why we gave you a more precise figure this year was because in the last few years, we had a bigger doubt whether we were going to do more sugar or more ethanol. We had a higher doubt, and now we are more sure that production will be more towards ethanol than sugar. And this is the reason why we decided this year, particularly, to give you a more precise figure for the volume of ethanol and also because of our commitment to have the product in hand in order to supply the market for the full year with no problem. And the market is very healthy, as I said, answering Lucas' question, we see a higher parity than the 70%. And this is the rationale. This is the reason why we decided to give you a number and not a range.
Leandro Fontanesi from Bradesco BBI.
Could you talk about the impact on the production of crushed cane volume? You were talking about a drop of 9%. And when we look at some consultancies, they talk about 6% to 7% drop for Brazil in terms of sugarcane production. So your drop is higher. Do you believe that the impact for the whole of Brazil could be higher than what these consultancies are saying? And this could point to a more difficult scenario for sugar than these consultancies are indicating.
Leandro, good afternoon. Thank you for your question. I will try to answer your question in 2 ways. First, in my guidance, with a drop of almost 9% in crushing of sugarcane, there is a very big dispersion between and among the different units. My unit in Goiás is dropping 4% in crushing but one in São Paulo is dropping almost 15% in crushing because the soil is weaker, and there was much less rainfall than the average. And despite of all the management and the crop treatment, this unit accounts for, I would say, almost 30% of my total crushing, and I had a drop of 15% in crushing from this unit.
And the state of São Paulo was much more affected than Goiás for instance, which was more affected than Mato Grosso and Mato Grosso do Sul. These 2 large states, the drop will be lower. But when you look at the overall figure, the drop of 7% is possible. I'm not going to say that they are right or they are wrong, but this could be. But in our view as well as São Martinho's, other companies will be doing more ethanol than sugar than what was estimated by these consultancies. And this could cause a lower production of sugar, and you will see a bigger drop of sugar in the market.
And because of the very constructive scenario for ethanol, you'll sell it, then you get paid the next day. You have consumption going up month-by-month with the recovery of the economy. And so the units could produce more ethanol and then you would have less sugar in the market, and you could have better prices of sugar because of that. This is, in a nutshell, our view. But comparing our 9% with the 7% of the consultancies, I think, it is necessary to make it clear that the concentration that we have is in São Paulo or Boa Vista, represents -- of the 20.5 million, represents 4.7 million tons of crop sugar. We are talking about 25% in Boa Vista and the other 75% are very much concentrated in São Paulo and very concentrated also in Ribeirão Preto and Araraquara, where there was less rain than in São Paulo.
And the mix, which is more ethanol, was there a recent fact that you -- that made you more bullish about it? Was it because of the -- did the vaccination come into play? Did you have any other factors?
Well, parity is one important item. And the market for the import of ethanol is very strong. Many people are exporting ethanol for United States and this takes ethanol from Brazil. And we are not really exporting this year because we have a very strong domestic market, but we see flows from other players, placing their products abroad. And because of that, the supply is shorter in Brazil as well. And this is the reason why we're making more ethanol than sugar.
Andre Hachem, Itau.
Could we look at the medium and the long run? We see some players focusing on renewables with cellulose ethanol for instance. Could you talk about your opinion about the cellulose ethanol?
Thank you for the question. The cellulose in ethanol -- as far as we are concerned, we are still looking and checking the feasibility. We are still checking the feasibility of production. In our opinion, it is still too expensive to produce, and it is not feasible yet when you think about the markets that could be bigger than it is today. So we're still trying to understand the market and the technology involved in order to see whether this will become feasible or not.
In relation to the other products, we made some investments in industrial ethanol in 2 units last year in Santa Cruz and Iracema, if I'm not mistaken. And we signed a very big contract in terms of the length of time to export industrial ethanol, and we have a team studying other markets as well. But so far, the focus and the capacity is for fuel ethanol. Industrial ethanol is still a bet in the market and it's still very small.
Rodrigo Almeida, Santander.
Felipe, I have 3 questions. I would like to understand your strategy of carrying over CBIOs and the target that you had around BRL 50. Is it still valid? And what factors lead to this price for CBIOs? Could you talk about the tax that you would have to pay over the amount of a certain debt? And talking about capital allocation, has there been any change because the prices are quite high for ethanol? Are you still interested in a possibility of M&A, especially in the plantations? So I would like to know how you're thinking about it.
Rodrigo, thank you for the questions. About CBIOs, we had some inventory of CBIOs. Well, last year was the first year, in fact, of our sales of CBIOs and the large volume of demand happened at the end of the year when distributors had to buy CBIOs in order to comply with the mandatory target. So we carried over. And when you talk about the CBIOs inventory, I think, it's very important to mention that it was closer to the result BRL 8 million, and there is an accounting norm now, and you have to mark it -- mark-to-market as CBIOs doesn't have a cost, you have to mark-to-market and the mark-to-market was posted at BRL 8 million. And the idea is to sell the CBIOs more towards the end of the crop year when the demand is higher from distributors. And assuming a very well-balanced scenario for demand and supply of ethanol, we have seen buyers with very good prices for the year. We are not in a hurry. We will probably sell it more towards the second half of the year.
And your last question about M&A. The scenario last year was very good, so much, it even had a record for this year. And we were already looking for biological assets in order to have an M&A in the regions where we have our mills for small biological assets in order to close the gap of capacities or to have debottlenecking for higher capacity to crush. And we are still looking for opportunities, but nothing will change our frame of mind in terms of dividend payout and making investments in our corn project. In relation to Copersucar, nothing new in the front. A payment is estimated for this year, the first and the second court-ordered debt securities that add up to the same amount that we had in our results added inflation to it. And there is nothing new regarding the discussion about the taxes to be levied, and this is still being discussed.
Luiz Carvalho, UBS.
Felipe, two questions. India recently announced the bringing forward of instead of 10% to 23% mix of ethanol in gasoline. So could this change the balance of supply and demand for sugar, for instance, from now on? So how do you see this measure on the part of India? And how does this talk to a more conservative stand regarding hedging for '22, '23 because you said something around 40%? Do you expect some change in that or a lower supply in order to accelerate your hedge? And could you give us an update about PSS? I believe that from next year on, this could become more relevant. You have already said something in your report, but in your release...
Thank you for the questions. In relation to the India announcement, we believe it is very positive, bringing forward the mix for -- or the blend to 2023. India is still a very important player in the sugar market, and they subsidize producers of sugarcane, as you all know. And with that part of the sugar exported from India hinders the market as a whole. And the idea is that with this bringing forward of this blend, you will be taking away exported sugar from the market -- from the international market, and this could bring the prices up. But we believe that this effect will only be seen 24 months ahead, not next year because we are talking about some regions in India, not all the regions in India.
So this is not going to be so quick, I mean effect the on the market -- on the sugar market. And the hedge, we have 38% of our hedge for next year, and we believe there is room for improvement, but much more in line with the higher consumption of sugar and a lower supply from Brazil because São Martinho and the other players should be producing more ethanol than sugar. And this means that there will be a bigger deficit in the market which would keep the sugar prices at a different level. So 38% hedge of sugar is because we are looking at the Brazilian domestic production, and it has nothing to do with India.
In relation to PSS, the pre-sprouted seedlings, we are planting 80% with TRS with Meiosis. Next year, we should be reaching a maximum crushing capacity for sugarcane, 24 million or 24.5 million tons. But because of the dry season, when you have this level of drought, we have to go back to 20 million, 20.5 million. And the difference, that is to say, the gap is very big. And as I said before, this dry weather will be impacting the sugarcane that was planted. And the sugar cane that was planted did not receive the necessary rainfall in January, February and March. And because of that, we gave a few steps back, and we are not estimating 24 million for next year. Let's say we have a normal summer. Let's say, we increased crushing next year, going back to 22 million tons, for instance, 22.5 million tons, in the best case. It will still be far from our potential that would be 24 million tons.
[Operator Instructions] Lucas Ferreira from JPMorgan.
Felipe, you're talking about the corn ethanol plant. When are you going to make a decision to go to a second phase? Please remind me.
The economics of the corn plant -- we have internal rate of return very similar to the one that was approved in the project. We have the price of corn going up, but the [ hedging ] is much better for ethanol that we announced the project and the decision to double the plant happened at the beginning of 2023 or the 2023 crop after we start up the plant and it starts full production in 2023. We still have about 1 year, 1.5 years in order to make the final decision.
We have 2 questions from the webcast. I'm going to read the questions. Just give me 1 minute, please. We have a question from Werner, who is one shareholder from Trigono. He asked about the auction of biomass. If we could get into that with 200,000 megawatts hour in this auction.
And the answer is I don't think so for this auction. The price that we saw in the auction should not go up a lot. It should be close to the price of the last auction plus inflation, and this does not make it feasible for us to have that.
And the second question from Werner, what is your view for the next crop of India because of the pandemic, because of the harvest?
We have been talking in our commercial area. We see that the pandemic in India has not yet affected yield of sugarcane, and it's a little too early to estimate anything. Apparently, the pandemic has -- is now a little bit better, less severe than it was, and we do not estimate major problems in India because of the pandemic. Of course, this could change. India has very -- has always been very difficult to read. But for the time being, we are working with this production, this yield estimate for India.
So I think we have no more questions. Thank you very much for your participation in the call. And myself and my whole team will be available to you. At the beginning of August, we will be reporting the first quarter of the next year. We have less production. As you saw in our guidance, we have an important inventory to sell. And when we look at the results of the company, we will have more products in production that really is a buffer for this drop. So if you still have any doubts, please get in contact. Thank you very much, and have a good afternoon.
São Martinho conference call has come to an end. Thank you very much for participating, and we wish you a very good afternoon.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]