Sao Martinho SA
BOVESPA:SMTO3
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Sao Martinho SA
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Good afternoon, ladies and gentlemen. Thank you for waiting. Welcome to São Martinho S.A. Fourth Quarter of the '21/'22 Crop Year Earnings Conference Call. Today with us, we have Mr. Felipe Vicchiato, CFO and Investor Relations Officer; and Mrs. Aline Reigada, Sao Martinho's Investor Relations Manager.
The audio and the slides of this call are being broadcast simultaneously on the company's website, saomartino.com.br/ir. [Operator Instructions] We would like to inform 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 forward-looking statements.
I will now turn the floor over to Mr. Felipe Vicchiato, who will start the presentation.
Good afternoon, everybody. Thank you for participating in São Martinho's call about the fourth quarter of the '21/'22 crop year.
On Page 3, we have the agenda for today. We will be starting with the financial highlights and then cash costs, price evolution, our production guidance and the guidance for CapEx that were sent to the market yesterday, together with the release.
On Page #4, we have a summary of the quarter. 28% increase in our net revenue, BRL 1.4 billion, adjusted EBITDA up 35%, 51% margin, adjusted EBITDA 47% up, BRL 404 million with a 27.2% margin vis-a-vis. One year ago, 23.7% difference and the growth in margin and the adjusted EBITDA comes from the best prices, both of sugar and ethanol in spite of the higher costs because of the inputs and also the high Consecana well.
Net income of the company grew 8.7% to BRL 225 million, impacted by some recurrent effect mainly financial expenses and with a higher debt because of the CDI in the fourth quarter of '22, which was much higher than '21. The leverage of the company closes March '22 with 1.93x, 25% less than last year and the volumes sold in equivalent TRS dropped 124% because of the lower crushing year-on-year comparison because of the [ recrushed ] 10% less in this harvest, and this impacted volumes sold. And we have better prices, and this is why we were able to have this growth in the EBIT and the EBITDA.
This is a summary of the sugar and ethanol prices, sugar going up less than ethanol because part was hedged with the lower average price than the market price at ethanol. As we do not have any future hedges, we have this result. And I would like to remind you that in the third quarter of '22, the average prices of ethanol were even better than the fourth quarter. The average price dropped vis-a-vis the third quarter because consumption dropped quite a lot in mid-November and December, impacting directly the January, February and March prices. And because of that, the company, especially in March, reduced a lot in the [indiscernible] volume of ethanol. And this will help us further for the next fiscal year because of the higher volume of ethanol.
And on the next page, we talk about the cash cost of the company. And when I talk about the cash cost, I'm talking about OpEx plus CapEx, the [indiscernible] in order to support the incentives and the [indiscernible], you can see an increase here in reals per TRS of 40% in the cash cost and the breakdown. As you can see, you have the Consecana with a lot of impact. The major part of this increase is because of Consecana because we transferred this totally to Consecana and then some other factors regarding shortfalls and where the shortfall is -- accounts for [ 3.3% ], 7.4% input, 2.6% here, labor and others 1.4%.
In terms of inputs, we had vis-a-vis last year, we had an increase of 80% in spite of all the investments that Sao Martinho makes in terms of reducing the consumption of fertilizers and increasing our own fertilizer consumption, there was an impact because of something that we were already buying. So these were the most important impacts. And the shortfall was the biggest one. We expected a few months ago to have a recovery of the shortfall but because of the weather conditions, it will not be this year that we will be able to increase crushing as we should. And it will not be right now. And the cost of sugar and ethanol as a consequence of the increase and the price of inputs and Consecana year-on-year. In the case of sugar, 40.6% going from [ 1,110 ] to [ 1,561 ] as we had the 32% increase -- had a pressure on the sugar margin.
And in the case of ethanol, 39.9% increase here and the price went up higher. So we can see 14.3 percentage points. But in the cost breakdown in sugar, we had the Consecana also of ethanol because this brings some distortion in the price of sugar as well. The sugar margin would be stable if we draw -- had an year-on-year comparison for the next year, starting in April '23. And based on the guidance for CapEx that we showed you yesterday, diesel should be going up 70% year-on-year, fertilizer 30%, agricultural machinery -- agriculture machinery 40%, and some of the others around 50%.
So you can see that we expect to see an increase in the unit cost of production of sugar and ethanol, around 10% to 15% next year. So as far as cost is concerned, what we can reduce in the operation with the [ precision ] agriculture that we do, we will see probably an increase in 10% to 15% in these costs, and we will not be able to reduce any fixed costs further because the yield of the sugarcane is still suffering because of the weather conditions.
On the next page, we have the price evolution, both of sugar and ethanol that will help us offset partially all these costs. In March, we had 72,000 tons of sugar hedged and [ 17.09 ]. And combined with the dollar sold, it would be BRL 2,200 per ton approximately. At least [ 2.2 ] comparing to the average price that we realized last year for sugar of our own sugarcane 1,653. You can see an increase in the price of 34.5% if we got this comparison. Currently, the prices around this figure with the dollar with [ 5.35 ] and we are talking about [ 2.1 ], [ 2.2 ] if we consider the freight per ton. So we see a major growth in the average price of our sugar -- our own sugarcane for sugar. It is important to mention that the comparison of this hedge has to be done with the own sugarcane and not sugarcane from third parties.
Currently, the price of sugar -- São Martinho and the other mills in Brazil migrate production more towards sugar than ethanol because of the screen price hydrous [indiscernible] as you can see that it's around 10% more for sugar. And so we have the production guidance here for sugar and ethanol. And right now, we are producing more sugar. At the beginning of the crop year the TRS was lower, and we produced quite a lot of ethanol because of the average prices of ethanol were quite good and with a good remuneration. But right now, we migrated production more towards sugar. But I do not believe that this will make the market -- we believe -- I believe that the volume of sugar crushed will be around the same as last year.
On the next page, we have the production guidance, which was part of the material fact that we published yesterday, 20.3 tons of sugar, 2% higher than last crop year, which gives a yield of 63 tons, 64 tons per hectare, a very low yield vis-a-vis our potential -- agricultural potential because we already had 85, 87 in the past. And in the summer, we had a low volume of rainfall, a lower intensity of sun shine. In April and May, almost no rain whatsoever in the region, which further aggravated the sugarcane yield. At the beginning of crop year around mid-April, the sugar that -- the cane that is being harvested has a very low yield vis-a-vis what we achieved in the past. And this is the reason why we are putting this at a very low level vis-a-vis the potential of the company. TRS should go back to normal vis-a-vis -- well, in the last crop year, it was very high. So our estimate is 142 kilos and here, 1.2% less than in the previous year.
As we had a very relevant volume of sugar and ethanol, 113 cubic meters of ethanol from the viewpoint of results and the volumes sold. It should be practically the same as we sold last crop year. We sold all the inventory in April because the prices of ethanol were already higher. And when we look year-on-year, the volume sold in sugar equivalent should be practically the same because we are going to turn the -- we are -- you can see that the price of CBIOs is quite good, 249,000 here, which further improves the margin of the company.
On the next page, we have a summary of our CapEx. Maintenance CapEx 11% higher because of the increase in input prices, fertilizers and labor and others. You will see that we carry here 12 months of inflation, and we have 26% increase here of operating improvements.
In terms of ESG, we have the potential -- the probability of increasing the potential because of higher integration and upgrading and expansion. We consider here the completion of the corn plant and also the thermal power plant. So higher CapEx basically because of inflation, and we expect prices of sugar to be better and offsetting the structural issue of costs which pervades the whole industry. So these were the initial remarks.
And now I would like to open for questions.
[Operator Instructions] Isabella Simonato from Bank of America.
You were talking about the sugar market. And there are 2 points that I would like you to clarify. When you talk about the discount of sugar and ethanol, sugar seems to have a relevant premium which caused Brazil to produce more sugar than ethanol. Why aren't we seeing this change in the production mix during this crop year? This is my first question.
And the second has to do with the corn ethanol. With the volatility at the lower prices that we see for ethanol in the short run, how do you see the economics of this project? Because in the past, you said that you were considering increasing or expanding the ethanol -- the corn ethanol plant.
Isabella, thank you for the question. In relation to the mix, São Martinho today has done 35% of the crop already. And up to 3 weeks ago, the price of ethanol and the price of sugar were more or less at the same level. Ethanol was even higher for a few weeks than sugar.
So I think that everybody started with a more balanced mix, not very much towards sugar. And this is why I do not believe there will be an oversupply of sugar. Now people are starting to change the mix gradually and also the small drop that we saw in the last 2 weeks that already prices -- We have hold this discussion with the government about the taxes and the PIS and the COFINS taxes for ethanol and gasoline.
So it would reduce the ceiling, it would be bringing down the ceiling proportionally for ethanol vis-a-vis gasoline. And now going more toward sugar, I don't believe that there will be time to make a drastic change. And the second point has to do with the yield itself. Initially Isabella, we believe that we would be increasing production around 5%, and we are dropping 1% instead.
And this reality happened in a couple of weeks. We had the problem of lack of rainfall in April, and the harvest was lower than estimated. And this is a reality mainly for all the plants in Sao Paulo, not Goias really because Goias is even a little bit better than we imagined. But Sao Paulo, where we have the biggest volume for the sector. And mainly for sugar, the yield is very low, around 10%, 15%, 20%. And there was an impact of fraud. We had a couple of frauds. And so there was a very big delay in the production of sugar -- of cane. I believe there will be no -- not enough sugarcane to be crushed for sugar. But in spite of all that, as you can see, we already have a major hedge for sugar, as I said a while ago.
Over 30% higher in our own sugarcane than last year, which gives us an additional push in terms of achieving irrelevant result. In relation to the ethanol plant, we have already bought about 50% of our needs -- of our core needs for crushing at a very interesting price. And we should be starting up the plant around the end of the current year. And maybe Boa Vista will be slightly delayed because it has a good productivity and -- but the economics themselves, supposing that next year, we will see the issue of PIS and COFINS taxes coming back like they were in the past. And there is a deadline until December for this decision. Then the economics of the project will remain very good, delevered around 20% and 30% -- higher than 30% in the opposite direction because of the -- even with the higher prices of ethanol.
So this is a very good level. And the future investment, which is the second part, we are detailing the project. Now the CapEx is quite high. We are talking about [ 1.05 billion ] comparing to [ 700 million ] of the first part. So the decision of making this investment or not will be reached at the end of the year or maybe next year, not September. And we have to wait and see this PIS and COFINS issue, the taxes. And next year with the new president, we have to see the price policy of Petrobras.
And besides all that, a much higher CapEx. So we have to wait 3 or 4 months to have a more balanced decision. But what I can tell you is that the project seems to be very good, but we still have to wait to have the final approval.
You said that you have already bought 50% of the necessary corn?
Yes, for the full year.
What if the PIS and COFINS do not come back? What about the internal rate of return and the change in the economics?
If we do not see a return of the PIS and COFINS, well, let's start like that. The PIS and COFINS for gasoline and for ethanol made the price of ethanol drop BRL 370 per cubic meter, more or less for the full sector, for the whole sector. So we have a challenge from July to December of selling ethanol at a lower price. And the strategy of holding this ethanol in order to sell it later. But with the PIS and COFINS, if we have it from July to December, we are talking about BRL 360 per cubic meter.
At Boa Vista, we have 200,000 cubic meters. We are talking about our figure, BRL 80 million less in the project without the cost offset. Because the cost is minimum, there is no Consecana involved. If it stays forever, the PIS and COFINS, the second phase of the corn will not happen because the return will drop very steeply.
And the current project, we talk about 30% EBITDA, 40% as the case may be. But you have to remember that the PEC 15 that was approved by the Senate and is being assessed at the Congress. It is to maintain the difference of the ethanol vis-a-vis gasoline. For all taxes, federal, state taxes. So we are not working with this scenario. We do not believe this will be occurring because it will stay in the constitution for 20 years. So we trust that this will be approved. And in January, this would be coming back.
Talking about capital allocation. You closed it with the potential of dropping even further with the situation that we see today. Given this conclusion, about the core ethanol project and the TPP, I understand you will be waiting to allocate capital. Could we consider the possibility of a buyback -- would the buyback be an option in this scenario? And what about what is core for the company? Would you consider other crops besides corn? This is the first question.
And the second has to do with the cost inflation, how much of that cost inflation is permanent? How much of that will stay for the next crop year because of the fertilizer costs and others? But how much inflation and other input will last more than with the impact on your costs? So these are my 2 questions.
Capital allocation. We announced interim dividends and interest on equity to be paid extraordinary dividends will depend on the dynamics of the crop. Because besides the investments in the guidance, we have the working capital investment in terms of corn because we are now receiving the corn. And so it does need some working capital. And buyback, well, it is a possibility depending on the price of our shares. In spite of the fact that the costs are very high, there is a good side to that, which is the fact that all over the world, it became more expensive to produce both sugar and ethanol. So that idea of the sugar price going to BRL 0.15 or BRL 0.14, this went to the next level. And everybody is suffering with that all over the world with fertilizers and price of labor. So it's around BRL 0.17, BRL 0.18. So we believe that it is here to stay and much lower than that.
I know -- in interim dividends, well, I don't think it will be possible. But certainly, we will be bringing forward the interest on capital as much as we can. This year, we paid 55% of our net income, [ 42 ] of the cash income and the idea is to keep things at this level.
And talking about diversification in the core business, no, I don't believe this will happen. We are not thinking about other crops. Biogas is part of the business itself. As soon as we find a model that is profitable and we are analyzing all the technologies available. And as soon as we find one which is profitable, we will be making this investment. Around BRL 160 million, the investment in biogas. And by the end of the year, we will be making a decision about that. And the second plan for core ethanol, we postponed the decision for a while because we have to see how this scenario plays out and Boa Vista has a very good option for that, and the decision has been postponed because of all the things involved.
And in relation to costs, taking your last question. It's very difficult to tell you whether these costs are here to stay. I have been with the company for 16 years. I have never seen a fertilizer price drop a lot from 1 year to the next. Fertilizer usually go up. As far as we are concerned, what we are doing, we are studying all the options so that we may rely less on fertilizers and be more assertive in the use of fertilizers and the application of fertilizers.
And we said on the second slide that our estimate is that our cost per TRS will be going up 10%. In spite of the increase in the cost of diesel, for instance. So this growth of 10%, 15% is because we will be reducing -- we have to be more efficient when we use the fertilizer. This is what I mean. I'm not saying that we are going to use less fertilizer, I'm saying that we are going to be more assertive in the use of fertilizer.
Diesel should go down and ethanol follow suit because when you think about the medium term, it has to be followed. But the spread -- the diesel spread is too high now. It's going up much more than gasoline all over the world. But all over the world, the diesel prices are going up much more than gasoline prices, and this ultimately impacts the whole sector one way or another. Even if you consider sugar, I answered Isabella about that -- the freight cost for sugar up to the Port of Santos is very high and sometimes it's better to produce ethanol because the freight to deliver sugar from where it is produced to the Port of Santos is too high.
So it's more advantageous to produce more ethanol for this reason because of the freight prices. Maybe costs will not continue to go up very steeply, but I cannot tell you really for the next year or so how this will be playing out.
Gabriel Barra, Citi Bank. Two parts. You were talking about the PEC. There are 2 PECs being debated the Congress. Biofuels, some things are being debated and what we expect to see at the end of all this debate? What will come out from all this debate about the 2 PECs?
And the second point has to do with your hedge position? In terms of strategy, looking ahead for '23, '24, do you expect to have a more aggressive hedging for the next crop year?
And the third part. When Isabella asked for question, which was the first -- looking at your sales strategy, could we expect to selling more ethanol around the middle of the crop year. What about your sales strategy for ethanol for the current year, the year that's starting.
About the PEC 1822, [ TLT 1822 ], it has already been approved at the Lower House and also by the Senate, and it places fuel with a ceiling between 17% and 18% for the ICMS tax and the 0 PIS and COFINS, both for ethanol and gasoline -- in this case, up to December. So the ceiling of 17%, 18% of the ICMS has no deadline. But the PIS COFINS tax is for 0 up to December for both gasoline and ethanol. In the case of PIS and COFINS for ethanol, we are talking about 360 reals per cubic meter based on the last price of gasoline that was at the refinery.
The PEC 1522, which is specific for biofuel that keeps the difference between fossil fuels and biofuels, the Lower House has to approve it. The Senate has already approved it. And basically with a lower ICMS. Just to give you a practical example, Sao Paulo has 12% ICMS, it would be going down to 4% for hydrous; and gasoline would be 18 -- 18% and 4%. But as far as the consumer is concerned, the consumer will see a drop in prices at the pump.
The impact would be the PIS and COFINS, which is just temporary, this goes up to December. It is 1 PLP and 1 PEC. One PLP that has already been approved and the PEC that has been stated by the Lower House right now.
Let's say, the PEC is approved, there will be an impact of the PIS and COFINS between July and December only. And about the strategy regarding the ethanol sales, once the PLP is approved, ethanol becomes less competitive from July to December with [ 360 ] per cubic meter. With that, Sao Martinho should be selling only the anhydrous part that has already been contracted or the agreement has already been signed with the distributor about 30,000 per month. And the remainder, we will be trying to sell at higher prices maybe between January and March. If parity goes up and the prices are better, we are going to revisit this. But the base case here, we know that in July it will be bigger than [ 60 ]. That is to say, less competitive because of the PIS and COFINS issue, and we will be assessing the market over time.
And you asked about hedge, we are evaluating considering that the volume of sugar in Brazil will be very short. We have to understand the production of the other countries and how it will be combined with the average price of the dollar. And we might start to do something for the next year, but still just a little bit because we do not see a very big sugar production coming in the next year.
Thiago Duarte, BTG Pactual.
There are 3 points I would like to mention here. Felipe, when we look at the sugar production guidance, are you considering an important difference when we think about the harvested area, TCH, the 2% increase. Is it followed by a 2% increase or more or less in your yield? And the reason for my question is the following: when we look at your planting CapEx, it went up very steeply last year. And when we look at the guidance this year, it seems to be very high as well. I just want to solve this out. Aren't you planting more than you did in the past as a proportion of your overall planted area?
And the second question has to do with the CapEx of the core mill. When we look at what you invested in the last couple of years, plus your guidance for the future, you getting very close to the total cost that you announced when you announced the project. Am I correct or I just want to understand if the investment will be close to your projection or not?
And the third question is the following. The growth in crushing and inflation and fertilizers and labor, et cetera. How much do you believe your costs should be going up this year, the unit cost. Well, it will be the total cost because the TRS is not going to change quite a lot. So what do you expect as a total inflation cost for the '22/'23 crop year?
I will start by the last. We believe that the cost will be going up 10% at Consecana. This is our forecast. This is our most current forecast based on all the cost increases that we see. Part of the 10% would be a carryover from 1 crop here to the other, but the ballpark figure would be 10% comparing with 33% more in the sugar prices, as I said before during the call, during the presentation.
The second regarding the investments this year, up to March '23 we will be ending the whole CapEx, BRL 640 million -- BRL 750 million overall. There will be nothing left for the next year. So everything will be spent within this year.
In the planted area breakdown. No, we have not changed that over the last 2 or 3 years, proportionally, Thiago, the cost of fertilizers becomes heavier than -- So the weight of the fertilizer is higher. And this is the reason why it became more and more expensive over the last few years. Added to that, we applied nutrients last year 30 million. And this year, an additional 50 million because we are going to reinforce these nutrients in the planting. Let's say, we have a big problem regarding the weather, then this is a precaution. And our own sugarcane should be going up around 3% in terms of yield. It grows a little bit more than third-party sugarcane. And we have more our own sugarcane than third party. So on average, it would be around 2%, but TRS going down quite steeply on a year-on-year comparison.
Very clear. My doubt was the TCH. So it is growing in line with the amount of sugar that you would crush -- of cane that you're crushing.
Christian Audi from Santander.
Felipe, I would like to go back to the capital allocation. It made -- you made it very clear about the second plant for corn ethanol, as your leverage is low, as your CapEx, you have already made it very clear what it will be.
The current situation regarding inflation and a lot of volatility combined with the analysis that you're making in the second stage, do you believe that in the last 3 months, this is leading you to be more cautious in terms of dividend payout also considering the upcoming elections because this is a moment of high volatility or am I reading it wrongly?
Well, thank you for the question. But it is -- all things together, it's the overall context. All the changes regarding taxes. And the most relevant has already happened, which is the ceiling for the ICMS for gasoline and the PIS and COFINS issue.
If it were not for the biofuel PEC, I would say that my profitability would be crushed. Without the -- we would have BRL 900 per cubic meter less in the total volume produced without the biofuel PEC. So this is a very complicated issue, and you can well imagine what we went through these weeks. So we have a minimum of 40% of our cash income, but we are bringing forward the interest on equity. And when next year, things are more clear maybe we can be more aggressive in terms of dividend payout. But now with [ 2.8 billion ] this is a very robust cash position. And we have very small debt to mature in the next few years, and it is enough for us to cope with this volatility that we are coming through -- we are going through.
Going back to the CapEx. The study of the second plant of corn ethanol, the decision that you will be making at the end of the year, do you believe it will be a final decision? Or will it be just a postponement? Will there be an overhang or do you believe it's going to be final?
We're not going to do it or we are going to do it. When we make a decision, it will be final. We might make the decision of waiting until March, for instance, waiting for some change in the price policy or change in the market. But once we make the decision of going ahead or coming back. Of course, if the scenario changes, Boa Vista is there, but we have to consider, for instance, let's say, the prices of corn are back to normal, more normal in the taxes on ethanol and gasoline, then we will have more visibility to make a decision.
[Operator Instructions] Lucas Ferreira from JPMorgan.
I'm sorry. I joined the conference a little bit late, and I don't know whether this question has already been asked about the corn plant. Have you already bought the necessary corn? And what about the [ DDG ]? Because of the hedging -- I know that you were talking now about the legislation, but how do you see the profitability of the plant in the first year?
Lucas, we have already bought about 50% for production of 12 months. So we are just receiving the corn, and it will be ready next week, and there was some rain in Boa Vista, and it delayed the coming in of the corn. In relation with the DDG, it has not been bought yet. It has to be produced so that we may do the tests for the clients. But first, we have to test the quality, the amount of protein. But we already have a map of potential clients in order for us to be able to deliver this amount with no problem whatsoever.
In relation to taxes, we believe that at the end of the day, after everything is approved, what will happen is that the price of ethanol and gasoline should be dropping at the bump and maybe ethanol consumption will be going up, ethanol and gasoline. And this will happen when São Martinho will be starting up the corn plant end of this year and beginning of the next. So the PIS and COFINS issue that is from July to December, there will be no impact on the corn plant because the volume from this plant will be sold in the first quarter of next year and the last quarter of the current crop year, up to then, the prices at the pump will be lower. And the impact on producers because of the ICMS will be practically zero and maybe consumption will be higher. Maybe this fuel will be a smaller proportion, a smaller percentage of household consumption.
So we will have from July to December, the contracts and the figure that I mentioned. I don't know whether you were following, but we sell around 30 cubic meters per month ethanol anhydrous -- hydrous. And other than that, -- we believe that in January, things will go back to normal.
There is another question here from the chat from Werner. The price increase includes the diesel prices and the impact? Yes. Yes, the reduction in diesel taxes is not considered because we take credit. When we buy diesel, we take this credit and we use it to pay the ICMS of ethanol. So when it goes to our P&L, it is already net of taxes. So there is no impact in the case of diesel, specifically.
And the second from Werner. Do you have a project for the use of methane? We are finalizing studies -- the CapEx went up a bit and the input for production are high as well. So a decision should be made up to the end of the year, whether it will be worthwhile to carry on with the project, but we do have a full team dedicated to that.
[Operator Instructions] Mr. Vicchiato.
Thank you very much for participating in our call. It was a record year for us. Unfortunately, the production guidance is not what we would like to see and it has been penalizing the sugarcane plantations that we have in the company. But once the weather goes back to normal, we will go back to our potential production.
Unfortunately, less rainfall brings this kind of result and the reduction in yield. But we believe that if rainfall goes back to normal, we will have a quick recovery. Thank you very much, and we remain at your disposal. Thank you.
São Martinho conference call has come to an end. Thank you very much for participating, and we wish you a good afternoon.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]