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. Conference Call to discuss the results referring to the fourth quarter of the '22/'23 crop year. Today with us, we have Mr. Felipe Vicchiato, CFO and Investor Relations Officer of São Martinho and Alessandro Freitas Soares, New Businesses and Investor Relations Manager as well as the Investor Relations team. The audio and the slides of the call are being simultaneously broadcast by the internet at saomartinho.com.br/investorrelations. [Operator Instructions]
Some information contained in this conference call may be projections or forward-looking statements about future expectations, and as such, they are subject to known and unknown risks and uncertainties that may lead such expectations not to materialize or be substantially different from what was expected.
Now I would like to turn the call over to Mr. Felipe Vicchiato, who will start the presentation. Thank you.
Good afternoon, everybody. Thank you for participating in São Martinho conference call about the fourth quarter of the '22/'23 harvest. And starting the presentation on Page #3, we have the highlights that are in our agenda. We will start with the financial highlights, the performance in the quarter and in the full year. What about our cash cost over the hedge position, currently are hedged for sugar, dollar and corn, our indebtedness up to March ethanol market after all the tax changes and the changes in the parity of Petrobrás. And finally, the production guidance for this year.
Going to the financial highlights on Page #4. We have a very strong quarter in terms of net revenue, 22% increase, basically driven by the improvement in the sugar prices and also the higher volume, both of sugar and ethanol, the volume sold. 19% increase in the EBITDA and EBIT 14.4%, BRL 432 million overall. Our cash income, given this improvement, 55% increased; and our net income, 32% down. Yes, the main difference between the net income and the cash income, as you can see on the slide and also in the earnings release, basically, it was a market of biological assets over BRL 100 million in the quarter, besides the effect of the IFRS 16 because of the higher Consecana prices.
Our cash flow analysis, we have to look at the cash income for the quarter and the half year. In the year, we had a growth of 15%. EBITDA 6.8%, EBIT dropping 5% because of the increase in cost of many inputs and also the lower operating leverage and net income dropping 31% and cash income dropping 15%, BRL 1.291 billion overall. For the year, we had a performance in the [Audio Gap] because of the changes in the tax policy 1 year ago when the COFINS went to zero and then there was a sale for the ICMS and they tendered the ethanol market, as you all know but the company as much as possible was able to export a lot of ethanol, about 1/3 of the ethanol was exported, 1 [ billion ] liters that we produced and the exported ethanol with a better average price helped reduce a little bit the impact of the local prices lower than the previous year or sugar. We had the average price that was higher when we compare the year-on-year, 22% higher. However, the volume was lower by 9% because of the drop in the harvest as we said in the previous quarters.
Now let's go to the next slide when we talk about the cash cost over the years. As you can see, we closed the cash cost for sugar at BRL 1,867 per ton at 12 months '23. A 100% of the CapEx of the maintenance CapEx between the off-season and planting and 18% higher than the previous year here, 68% higher when we look at the 2 years horizon from '21 to '23. In '21, BRL 1,110 and '23, BRL 1,867.
In terms of ethanol, there was the impact of Consecana going up 50% during the period, but the impact of Consecana has a direct impact on the revenue. Other inputs such as fertilizers, for instance, went up over 100%. And this was the main reason why we saw the industry as a whole placing cost of ethanol and sugar as much higher than a few years ago, and this is one of the reasons why the long-term sugar prices went up even producers, both in Brazil and globally, have a much higher marginal cost than they had a few years ago.
And in terms of the equipment, agricultural equipment going up steeply over 150% and this has a direct impact on the asset replacement cost. And for this year, we expect a slowdown in costs. We should see cost going down a little bit this year given the price of fertilizers going down 20% is dropping a little bit less than gasoline. And this is the difference because of the ethanol prices but we expect the cash cost of sugar and ethanol going down between 5% and 10% during this year that we are just starting.
On the next slide, we have our hedge position closed at March. São Martinho had 2/3 of the sugar hedge already realized at an average price of BRL 2,391 per ton, matching the sugar dollar and outstanding -- the dollar was outstanding because we have other obligations that were working as a natural hedge. Year-on-year, with the current sugar prices, with our own cane at the market price and the dollar at the market price [ 4.80 ] approximately. The price of sugar for our own sugarcane should be BRL 2,400 per ton, BRL 250 per ton higher than last year, considering that I will have 1,100,000 own sugarcane. We are talking about a difference in our operating result of almost BRL 300 million because of the improvement in the sugar prices.
Additionally, the hedge position, in March '23, we had 456,000 (sic) [ 453,000 ] tons in corn, 74.6%(sic) [ 74.3% ] BRL/Sc and this corresponds to the whole production of corn from January to December. So I don't believe we will have a big advantage coming from the lower prices of corn now because the purchases had already been made before as the corn harvest was much higher than expected and with a very important reduction or impact on the economy of Brazil.
And this is the reason why the prices went down steeply. So for this year, we will not be feeling the impact of the drop in the corn prices. But for the next few years, we have not bought anything yet. So for the next harvest, we should be tapping into this drop of the corn prices.
Now talking about the company indebtedness. BRL 3.5 billion, 20% higher than the previous year. Net debt/EBITDA 1.05x and in spite of the cash generation and the announcements of our investments in the cogeneration and corn mill, beside the working capital that we had because of the corn inventory and other things, we expect this to go down for the next quarter, especially because of the tax situation. BRL 3.1 billion in March '23 representing more or less 3 years of cash in order to pay for our debt in the period to 5.5 years, 16% long-term, 84%, 90% of our debt is in reals [ and rest of ] 10% in dollars, and we try to match this to our commercial operation that is the same, the currency and the sugar together. And this is why -- this is the reason why it has shown [ a sustained ] balance sheet.
And here on the next slide, we talk about the ethanol market from January to June. We saw a drop in gasoline prices, 14%, 15%. And in spite of all the tax changes that occurred and the COFINS issue and the adoption of the ICMS that improved the competitiveness of the ethanol. In spite of all of that, we see that the drop in prices of gasoline is impacting the prices of ethanol. And the prices of ethanol in the domestic market are at the lowest price in this current harvest year -- crop year, hydrous ethanol because we have parity of about 70%. These prices are for hydrous ethanol, not anhydrous ethanol. Most of the São Martinho's production is concentrated in the production of anhydrous and this is why the corn plant, for instance the plant of Sao Paulo are making about 70% anhydrous for -- and moving for exports because we have a premium when we export. But the most important point is that the drop in the fuel price because of the gasoline drop hinders ultimately the competitiveness of ethanol.
On the next slide, we have our production guidance. Together with the results we published yesterday, the expectation is that the combination, ethanol and corn will grow our TRS produced at 18.8% and crushed sugarcane going up 7.4% with a better TRS. In sugarcane, we see a growth of about 8.8%. The processed corn, we will not be able to operate at full capacity this year, about 500,000 tons -- there was a slight delay in the beginning of the crushing because of authorizations and licensees that took a little bit longer than expected.
And besides a slower ramp-up, and we were not able to reach this in -- not even 50% of capacity in the first week. And today, it's already normal. We are operating between 80% and 90% of capacity. And the recovery of corn is worth when the sugarcane mill stocks when there is a lot of rain for instance because of the El Niño which is the case this year and when you stop -- when you restart it, it is a little bit slower but we expect to have about [indiscernible] and when we have a guidance of volume for crushed sugarcane during the crop, this is a consequence of the production in the field. And this year, more specifically, we are placing a guidance of 21.5 million processed cane but we expect or we understand that we will have more sugarcane being crushed than that.
We could be 22 million. And the point here is the following. Given the [ El Niño ] impact that has already started in June with the rain that we had in the last two weeks and it's not typical at all. And we believe that the harvest will be a little bit longer and this is why we are saying that we might not be able to crush everything and we have to keep some sugarcane for the next one around the end of March with a longer crop next year.
Should we be successful and let's say, El Niño is weaker, and I have more days of harvest up to the end of the year, then the crushing volume could be better because I have availability of sugarcane. And the summer was very good, by the way, with a lot of rainfall and very good rain at the beginning of the harvest. So this is very helpful. The June rainfall was very high. It was very good, and it will irrigate the beginning of harvest. And when we have the sugarcane in the field, what we have to see is how strong El Niño will be.
We believe that at least 21.5 million, we will be able to crush and deliver this growth in the TRS produced 90% but when we look at the TRS of sugarcane and in production itself, we are talking about 14% more sugar in the Sao Paulo mills, which are more focused on the production of sugar. 23% increase in the production of ethanol, reaching 1.1 billion liters. And most of it is anhydrous, which are better margin. And Vice President, [ Alcami, ] announced today that they are studying the feasibility of placing 30% blend of ethanol and gasoline, this is very good news, and I believe that [indiscernible] and the other groups are ready to deliver this additional volume to the market.
And when we look at the mix of ethanol and sugar because of the corn mill, we said that we are going to produce 43% sugar and 57% ethanol. And last year, it was 45% sugar, 55% ethanol.
On the next slide, just to close and open for your questions. We have the CapEx guidance also published with the result of the company. And our guidance to have BRL 2.5 billion total CapEx for the '23/'24 crop year. This guidance, part of it has a carryover from one harvest to the other. '22/'23, our expectation was to have BRL 2.8 billion in CapEx. And there was a delay in planting because of the very heavy rainfall and also because of other investments that were part of our schedule and had to do with the availability of equipment by our suppliers.
And last year, we had to reduce from BRL 2.8 billion to BRL 2.5 billion but this amount was transferred to the '23/'24 harvest, and this is why we have the normalized CapEx for this year. Net of the effect of last year, this carryover of last year, we will be talking about BRL 2.1 billion, more or less.
Okay. Now I would like to open for questions.
Now we will start a Q&A session for analysts and investors. [Operator Instructions] Our first question comes from [indiscernible] from UBS.
Good afternoon. Congratulations about your hedge strategy. What about your hedge strategy in this scenario? Does it change vis-a-vis the previous crop year? You expected it to be a little bit higher although you have similarities with last year and for the '24/'25 as well. In capital allocation, you have already allocated most of it. But now for '23/'24 and '24/'25, are you considering some buyback? Do you have any other projects that are being contemplated regarding the flexibility of the sugarcane production, the profitability of corn?
Thank you very much for the questions. In terms of our hedge; in March, we already have a very relevant volume of sugar hedge. We're talking about 66% of the total volume of our own sugarcane is already hedged. So I still have 1/3 only, considering the current market conditions, and they are more difficult than they were a few years ago, especially because of the expectation of [indiscernible] El Niño from the centers down the south, then we will not be hedging a lot of the remainder, and we will wait and see the behavior of the market. For the next year, we are still studying, but we don't have this kind of expectation that is the sale of sugar prices going down next year because we do not see a very big volume -- of volume production for next year.
And we talked about the possibility of having a mix in São Martinho and there are no big bottlenecks, and it has to do with the sector because when the prices of sugar were very different from the ethanol prices in, investments were made where it was more profitable and removing, let's say, some bottlenecks that -- it seems that today these bottlenecks have already been removed.
And you still have a small investment here and there, mainly, but this would not openly increase or hugely increase the production of sugar here. And as you can see, India is going towards 20% ethanol and gasoline and this would remove sugar from India in 2 years' time. And you can see that the scenario for the sugar market is as it is, as I described. And we believe that our current hedge position is quite comfortable already, and we are waiting for the second half of the year to evaluate this.
Regarding capital allocation with possibility of [indiscernible] ethanol project and double production that it is directly linked to the long-term oil prices and the price of gasoline, whether it's going to continue with an international parity or not in the long run. So we are only going to make the decision of increasing or expanding the corn production next year. We have first to evaluate the operational possibility of the plant and 1,500 tons per day for instance. Another important point is to have a better premium for the product. And after we reach this level of stability and after we see ethanol prices at a more acceptable level, then we will be making [indiscernible] And then the remainder cash should go to dividend probably. Thank you.
Thiago Duarte, BTG Pactual.
Felipe. I would like to ask 2 questions. A follow-up question. The first one has to do with the premium in the export ethanol. I think it's very clear, mainly in the last harvest, the average realized price really was much higher, vis-a-vis the domestic prices. And could you give us a range or an order of magnitude of the size of this premium when you export vis-a-vis the anhydrous that you sell domestically?
And do you believe that these premiums will continue to make sense from now on? And the second question has to do with crushing, just to have it clarify, your TCH seems to be growing more than the 7.5% of sugar availability. Your TCH is growing by 10% but you run the risk of having to have some standover sugarcane for the next year.
I just want to be sure that we have understood the maths. And it means that you would have more cane to be crushed for the '24/'25 harvest.
And then another follow-up. Just to understand the amount of corn crushed in the new mill. Today, you are already crushing close to the nominal capacity. And if the answer is no, when will you be reaching the nominal capacity? It would make sense for us to work with 500 as you were crushing.
Thank you for the question, Thiago. The first question has to do with the breakdown of premium in ethanol. I can tell you about this year. In the year, we had 332,000 cubic meters exported, of which 245,000 cubic meters was anhydrous and 87 cubic meters was hydrous. And in the case of anhydrous, the export was already net of all commercial expenses at [ 3.8. ] And my average price for anhydrous was BRL 3,583. In the case of hydrous, 87,000 cubic meters exported, BRL 3,523 and the average price of hydrous last year was BRL 3,014.
So we are talking about the premium of about BRL 600, BRL 700 anhydrous and hydrous BRL 400 on average. And this premium was within a very important window of time. And when we saw this window because of the war, we tapped into this advantage and we do not see this window happening this year so far. Our collateral area does not see this or this possibility of having this window. And we -- ethanol for industrial purposes for instance, have a premium, but the premium is about BRL 100 and BRL 150 per cubic meter. And last year, it was really -- totally unexpected, let's say, because of the war.
And the second question about TCH, you are correct that we expect a higher TCH because of the growth in our crushing and the current number today. And of course, this is not useful for the full year, but if you compare the areas that I harvested this year and the harvested areas last year, the same area, production about 20% higher than TCH.
Last year was very much affected by the drought and also by the frost. So this year is going to have a very good yield. And we will have to have some stand over cane because we're not going to crush all of it. In 2012, we crushed up to close to the Christmas. If it happens this year as well, so it's going to be higher. In terms of corn, today, we have 80%, it has not reached 100%. In some days, it is 100%, but we have to have a window of about 10 to 15 days. And in this window, we have about 80%. But you may consider that next year, we will have the nominal capacity because of the effectiveness of the plant and the ramp-up. There was also the problem of delay in all the licensees that we had to obtain, but once they are approved, so our estimate is to be close to 500,000 tons crushed.
Isabella Simonato, Bank of America.
About the corn ethanol, Felipe. You said you have already bought all the corn that you need for this year. Maybe you could go back to your policy of corn storage for the next harvest. From the viewpoint of profitability and also of cash generation, are you going to make any adjustments? And my question goes back to cash generation for the company as a whole. Besides the operational side, is there anything you expect to do this year in order to further accelerate our cash generation having to do with CapEx, maybe or do you have any other alternative to release more cash over this year?
Thank you for the question. About the volume of corn that we bought, we have 2 answers. The first one is that in January, we closed January with a volume, I can have 250,000 tons of corn bought and this is what we had in our storage in our warehouses. We expect it to start crushing in January. But as the authorization licensees were delayed, this corn remained in our storage and we were not able to crush. In, let's say, 45 days almost of corn inventory that I expected to crush and I did crush.
And this is the reason why you have a higher volume in this inventory without crushing. And usually, we buy corn in the second crop in June when we have a very large volume in the region. And what is our expectation? 250 being crushed up to mid-June. And then in the second crop, we would be buying corn at the cheaper price. In mid-March, it was [ 85, 90 ] in the region because there was no expectation of, for instance, the corn that we were looking at [indiscernible] it was 85, 90 and we didn't expect any increase in the production.
And we adopted a more conservative policy to have a very good profitability and buy from a large producer later. And this is why when you look at the 450,000 tons, you see two impacts. The first one is that we have all this corn there in the storage without being crushed, waiting for authorization. And the second was that the prices went up and we bought beforehand in order to guarantee a margin.
Having said that, we believe that for the next year, we should be crushing all the corn that we have in our storage up to the end of February, and not necessarily have a full working capital with 100% of our storage already bought. And this would release part of this working capital from corn. And we are having a strategy of renting some storage space in the region.
And if we have an excess corn, we can buy this beforehand, and we would be paying this when we started crushing and this is one possibility. But in rough numbers, supposing a price of corn and it's only anhydrous at the corn plant. And we believe that from the viewpoint of production, we are going to have this ramp-up and still have BRL 100 million [indiscernible] and that would be reasonable if you consider all the difficulties and stumbling block that we had on our way. And I think you are something else who asked about releasing cash and about our corn production. Thank you very much.
Regis Cardoso, Crédit Suisse.
My topics are different. One -- the first one is about dividend, and we're talking about capital allocation in the forefront, very much focused on shareholders payout. And it seemed to me that the year-to-date was lower with the distribution so far was lower than 40% of the cash income. Is my calculations wrong? Or are you planning future dividend payout? And do you believe they could exceed the 40% of your dividend policy? Given the dynamic of waiting to see whether you're going to expand your ethanol -- corn ethanol production or not.
And the second question has to do with -- about other changes in pricing policies and tax issues of gasoline. And what do you believe is the agenda of the sector with the government, what other changes would be necessary in order to further encourage production of sugar and ethanol?
Well, first, dividend. Our proposal is to pay 41% of our cash income. We will be paying 41%, BRL 530 million of which we have already distributed via interest on equity, BRL 250 [ million ] last year. And the Board has already approved and it will be started at the shareholders meeting. The remainder, BRL 275 million, if you add the interest on equity to this amount, you have the BRL 530 million, which is 41% over the cash income of the year. And we also announced the interest on equity. Well, for this year, it is -- it has just started. It has nothing to do with the previous year, and this is a pre-payment that we make, and there should be another prepayment in December, supposing there are no more tax changes.
Regarding the Petrobras policy and the sector agenda with the government. What I can say is that from the viewpoint of tax changes, in March or beginning of March and the end of February, there was a partial return of COFINS for gasoline and ethanol. And the remainder to go back to where it was before, we believe it will be at the end of this month. And in February, the Minister of the Treasury adjusted the COFINS partially.
But in order to offset this, he levied the tax on the export of oil for 4 months, and they will come to an end at the end of June, and there will be a further evaluation whether it will be coming back in full. And there has been a change also in taxes regarding gasoline and anhydrous, where taxes will be calculated at a fixed value and adjusted every 6 months by the average of the prices and this improves our competitiveness.
That is to say ethanol vis-a-vis gasoline. So I believe that the tax policy is going okay, it is going back to what it was before June last year. The ICMS and the PIS and COFINS are a little bit less but going back anyway, returning to where it was. And the usual parity, so oil prices are very volatile this half year, and some weeks ago, the price of gasoline was beyond parity. It was higher than parity. Today, it is lower than parity, that's life. The Petrobras policy now is to adjust prices in a smoother manner, be it up or down and not exactly following the prices of gasoline and oil every day. And for the first half year, all in all, I think things are going well. And looking at the year, the price parity of -- with gasoline should be in line with the global market in a 12-months window. This is what we are placing our bets on.
The next question comes from [ Joachim ].
Do you believe that the recovery of the Center-South will be worse than the 7.5% that is being estimated? What are your thoughts about that?
[ Joachim, ] thank you for the question. I believe that the yield of the Center-South should be close to the 7%, we are estimating, we are talking about the recovery. And the big question mark has to do with how much Center-South will be able to crush. Will the Center-South will be able to crush all the sugarcane vis-a-vis the weather condition that could have a very big impact.
Last week, we were not working for 3 days because of the rain and then we've resumed production but it is not homogeneous. That is to say, it's not [ all the mill ] that can go back to production with the same level of efficiency. And I think it will be -- this year, we might have a problem regarding something or a challenge that has to be managed that is how fast can we resume our crushing. And when we talk about 7%, we are talking about crushing, our yield should be better than that. But our estimate is for crushing and not for production.
[ Alex Henry ] asks about -- now this is about corn ethanol, whether they are going to be carried out at the São Martinho plant now.
Given the logistics and the availability of raw material in the Sao Paulo region, in corn ethanol, 80% of the cost is the corn itself. And 1/3 of the revenue, the [indiscernible] where consumption of protein is very high in soybean meal vis-a-vis replacing soybean meal. So in Sao Paulo, it is not the case. First, we had to double the Boa Vista production and in a second moment, after a few years, reevaluate it again to see if it's worth doing this in Sao Paulo.
[Operator Instructions] And there are no more questions. We would like to give the floor back to Mr. Felipe Vicchiato for his closing remarks.
Thank you very much for your participation. In about 1 month or 45 days, we will be having our call with the results of the first quarter with a very good yield, as I said before, and the challenge is to have a return to production for the whole industry. And if you have any additional doubts, please do not hesitate to contact us.
São Martinho's 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.]