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 the São Martinho S.A. conference call to discuss the results for the fourth quarter of the '23, '24 crop season. With us today are Mr. Felipe Vicchiato, CFO and Investor Relations Officer; Alessandro Soares, new business Officer, External Communications and IR; and the Investor Relations team of São Martinho. The audio and slides of this conference call are being broadcast simultaneously over the internet at www.saomartinho.com.br/ri. [Operator Instructions] We will then begin the Q&A session for investors and analysts when further instructions will be provided.
Please be advised that certain information contained in this conference call may contain forward-looking statement. Such information is subject to known and unknown risks and uncertainties that may cause such expectations not to be realized or to differ materially from what was anticipated.
Now I would like to turn the floor to Mr. Felipe Vicchiato, who will initiate this conference call. Thank you.
Good afternoon, everyone. Thank you for joining us this afternoon. I will move on with the presentation initiating with the agenda of the points that we believe are important to talk about the quarter and the year. I will talk about guidance and the CapEx for production. Yesterday, we released the information at the end of the day, the closing of the market. We have the expectation for the quarter. The cash cost for the crop season with a little bit of expectation for this year. We will refer to the corn operation this year. The operation of the plant, the evolution of the hedge prices, both corn hedge and sugar hedge.
And finally, I will conclude saying that the ethanol base was the major detractor last year. We understand that now because of the demand issue, it's much healthier.
Now moving on here, on Page 4, we have the production guidance of the company. We expect to produce 2.9% less in sugarcane when compared to last year, reaching 22.4 million tons of sugarcane. However, with the TRS of the final product being better than last year, so that the produced TRS is almost flat once we compare it year-on-year.
There were some changes in this first year to increase the sugar mix. So there was an increase of 6% in sugarcane production this year, sugar coming from the sugarcane crop and then the ethanol production remains flat once you combine a drop in ethanol production coming from lower crushing of sugarcane and a 20% increase of corn-based ethanol.
This year, our corn plant is operating at full capacity, crushing approximately 495,000 tons. So the results turned out to be 26% higher when compared to last year. Now when we look at process cane at 2.9% lower, we also see a decrease, which is lower for our own cane and a higher decrease for third-party cane. Our own cane is about 1.5% vis-a-vis last year and third-party cane is dropping between 5% and 6%. And the combination of both gives us that 2.9%.
This is a very important point because we will manage to have a better cost dilution next crop season because we have more of our own cane and the cost is lower, so the dilution is higher. So the drop is mostly concentrated in third-party cane because there are also other aspects involved like variation in agricultural management practices and region.
We -- I mean summer was quite dry this season. And that summer remain through April and May, 45 days with no rain in the region. Therefore, we believe that this is why the guidance is slightly lower when it comes to sugarcane production.
Now moving on, now we would talk about our CapEx guidance for this year. Our guidance is BRL 2.5 billion, pretty much in keeping with what we had last year, which was BRL 2.485 billion. Last year, our CapEx guidance was BRL 2.7 billion. We were able to save some part of it. And the other part was rolled over to the following season, about BRL 100 million were carried on to -- towards '24, '25 meaning to 2025 would be a number -- BRL 130-some million less if we were to fulfill the guidance that we had released at the end of last year.
It's worth mentioning that guidance in terms of greatness, BRL 1.9 billion refers to maintenance CapEx, maintenance and cane planting. BRL 5 million is fleet in agricultural machinery and the remainder refers to investments already hired by the company as the biomethane project that should be ramping up in the middle of last year, a higher sugar mix.
We are now concluding some investments so that our mix will increase the amount of sugar for the next season. And we also have an efficiency project related to the 2-row harvester that would also give us about BRL 150 million in CapEx, meaning that this will not only increase efficiency, but also reduce the cost of harvest. When the investments are lower in the coming years, and we no longer have growth CapEx, the number for CapEx in the company would be around BRL 1.9 billion.
Moving on, here, we have the financial numbers in that semester, we sold a lot. We grew about 65% whereby we grew 20% in terms of our sugarcane volume. And we grew 113% our ethanol volume. However, in the case of ethanol, given the price conditions that occur between January and March, the average price is 30% lower, which considerably hurt our margins, both EBITDA and EBIT margins. We also see that net income was [ BRL 607 million ] accounting income mostly attributed to the prepayment of the court order debt payments and everything ended up by being paid at the end of March. So we just do a reconciliation to look at a cleaner figure in terms of net income, including the court order that securities and ICMS issues that we credited. So the net income could amount to BRL 150-some million if we have a nonrecurring effect in our results. But obviously, this cash had a positive effect on the G&A of the company. So our net debt over EBITDA is pretty much in line with what we had last year, 1.8x despite all of the investments that we did to conclude the corn plant and the beginning or the ramp-up of the biomethane plant.
Here, as [indiscernible] on sugar. Net sale price was [ 125 ] margin increase percentage points [indiscernible] of ethanol. So this comparison is [indiscernible].
[indiscernible] compressed our margin for the whole group and basically for ethanol, we kind of flat.
[indiscernible] We have some [indiscernible] push full capacity. We closed to 390,000 tons of a total of [indiscernible]. And with the ethanol prices, as I mentioned in the previous slide, we have a first year of corn with an EBITDA, negative EBITDA of about [indiscernible] for this year. [indiscernible] 100% of the [indiscernible] capacity.
[indiscernible] So earlier than last year, 20%, 25% lower in terms of corn cost -- in corn cost, [indiscernible] 80% of total and ethanol production cost, and we expect to have much better results in corn [indiscernible] and on the [indiscernible] of the ethanol price and have almost BRL 200 million year-on-year.
This hedges a little bit more involved. We've [indiscernible] secured at this level, hedged at this level. And the market has an expected driven by [indiscernible]. And this is the main [indiscernible] declining since mid [indiscernible] depending on the Brazilian [indiscernible] we might have surprise in [indiscernible] sugar and we might have this deficit [indiscernible] end of the crop. And as I mentioned, given that we have the summary in the beginning of the [indiscernible] no rain. It is possible [indiscernible]. When we're going to have crop seasons [indiscernible] Crop season starting in September. We should see a significant [indiscernible] compared to last year. I'd like to remind the last year [indiscernible] This is exactly [indiscernible] where we have [indiscernible].
So the yield is expected to be lower. So [indiscernible] will be very different when we break it down into [indiscernible] in terms of [indiscernible]. Lastly, [indiscernible] we'll have the Q&A. We have here a summary of the performance of the ethanol market, internal consumption behavior. Last year, ethanol accounted for only 20% of the total auto cycle. Autocycle [indiscernible] in Brazil, [indiscernible] below 16%. So the consumption took longer [indiscernible] this year, and it will [indiscernible]. And we can in management that we meet 10% or to in September. That's our.
Having the campaign that we've started running in the second half of January to make people aware of the benefits of ethanol, economically and in terms of the sustainability. So I think it's in everyone's mind now that it makes economic sense to consume ethanol. We'll see how the demand will respond. Last year, we concentrated a lot of our sales in the last month [indiscernible], which ended up giving our results.
Back then, the demand would be resumed given the parity and that did not happen. But now with demand at a very good level. When we look at it [indiscernible] over 15 days, we are not expecting the same problem we had in the past. These are my general comments. I will like to open the floor for questions.
Thank you. We will now initiate the Q&A session. [Operator Instructions]
Our first question comes from Isabella Simonato.
Felipe, I would just like to go back a bit when you talk about crushing and the weather is in fact, it's been much drier and hotter than normal. And I think this also impacted crushing because the growing season was extended until December. But I think your TRS estimate, it's even more positive. And at the beginning of the season, according to the data, I think TRS is a bit lower. So could you give me some more color and tell me what is behind that assumption?
And what would be the risk? And in terms of climate in the past few days, I don't think that the weather predictions are that different. And the second question refers to the sugar market. In fact, we've seen or maybe different opinions in terms of what is happening in the worldwide crop season '24, '25. There is an anticipation of a super season or the market is a bit tighter. I would just like to hear your opinion about the price behavior and what do you see in terms of pricing for the rest of the season and even the beginning of the next crop season.
Isabella, thank you for your questions. Well, in fact, the drop in sugarcane crushing of around 3% stems from that dryer climate. If we had any normalization of rainfall in the summer, things would be higher because of all of the investments we need and the amount of sugarcane we have the, the final TRS is a combination of the following things. When it's dryer, there is a higher concentration of GRS. But this number also contemplates a better industrial efficiency. When you talk about gross TRS, it's a combination of better cane TRS and the combination of the cane TRS with industrial tires. Last year, São Martinho, in particular, there was an issue related to industrial efficiency because it was lower than expected. Now we see the recovery. And that's why our final TRS is slightly higher than the rest of the industry.
Now in regards to sugar, well, it's very difficult to have a good reading about the sugar market with 5 million in surplus. I mean, we have a lot of dissenting opinions. Our hedge today currently, 80% is already fixed at that level that we gave you before, mostly concentrated in the first screens, I mean, the last screen, we don't have a lot of hedging. We believe that in Brazil, we saw lower sugar production, sugar yield and prices may react.
We see a market assumption that Brazil will produce more sugar, but what we're seeing is that despite the fact that a lot of people are investing in crystallization, we have 2 problems. The first problem was that the basic industry was not able to deliver all of the necessary equipment. And the second issue is that once you have a very dry crop season and the season is moving very fast, the daily average is moving fast. The conversion of bags of sugar per ton is lower than what was anticipated because the mill is full. Everybody is using their full capacity, therefore, the sugar conversion per ton, which is an indicator that we look quite frequently that indicator is lower than anticipated.
If the season was moving at a slower pace, certainly, that sugar conversion of the bag of sugar per ton would be much better. So in our view, Brazil would be a leading indicator for this crop season if we could have a lower volume of sugar than anticipated. But obviously, we have to keep an open eye. We have to keep an eye on the other countries like India, for instance. And we have to look at the conversion of sugar ethanol according to the program they have, additional experts from Thailand and so on.
It's very clear. If you allow me another follow-up, your opinion in terms of what should we expect in terms of India, whether that is something that should occur in the short run or you're not considering that so much when we look at sugar prices going forward.
For this year, we think that the crop season in India will not have as much ethanol as previously estimated. And the volume is pretty much in line with what we showed you in one of your slides. You should be something close to 31, 32 million tons. I mean there were elections in India, and that's why they delayed the season. There was a worsening in the season in terms of ethanol conversion. But the ethanol program is in progress -- it's just a matter of time, 1 or 2 years probably until we see some other effects.
Our next question from Gustavo Troyano.
I would like to hear from you 2 particular points. One is the cost estimate for the next crop year. You already talked about the TRS guidance year-on-year with lower crushing volumes. And you also mentioned this composition between crushing and your own cane. Could you elaborate a bit more in terms of what we could expect in terms of unit cane cost for the next crop here. And my second question, I think it's a follow-up on Isa's question because that productivity dynamic was very clear like in the last third part of the period, you would have lower yield. So how comfortable are you to operate in a short window? And when do you think it will be more prudent to get that 20% that is still exposed? I just want to have a better idea of how far do you think you could wait for that sugar price to evolve.
Well, we are getting to the end of June. We are heading towards the second half of June. So I think until the middle of September, we will have more clarity in terms of how sugar production will evolve. And with that, we will make decision in terms of whether or not we will accelerate our hedging.
In regards to cost, we believe that this year will be a more economical crop year because when you have lower crushing, but higher TRS, your unit cost is lower because you have lower labor cost, you consume less diesel oil. In addition to that, there are some very important inputs because prices were down. So we believe that there will be about 5% in BRLs in terms of cubic meter of sugar, and then we will be able to reduce the comparison year-on-year without considering Consecana either up or down. We are just referring to the cost that we can control. This is our best estimate today.
Our next question come from Thiago Duartes from BTG Pactual.
I have 2 questions. First, about the CapEx guidance and I understand you spoke briefly about this. [indiscernible] part of the CapEx was last year came to this year because the CapEx last year was [indiscernible] was transferred to the [indiscernible]. I just want to quantify [indiscernible] significant portions of [indiscernible] improvements associated to the [indiscernible].
I'm not sure whether we can try to match the amount invested [indiscernible] in terms of EBITDA generation for these 2 projects in particular because I understand that from [indiscernible].
[indiscernible] these are the 2 big expansion [indiscernible] for the results of the company [indiscernible] how much [indiscernible] BRL 500 million in business CapEx. How much do you think this can generate in terms of results for the company? The second questions has to do with dividend, dividend payout post the [indiscernible] 40% of the cash net income. This year, if I understood you well, we don't [indiscernible] understand [indiscernible] leverage of the company is super low. We have the payments we see to become registered.
So the discussion regarding capital allocation and gain momentum. I'd like to hear more about this -- let's start with the second question first on why the Board of Directors proposed a minimum payout of 25% growth because of the buyback. And we have a lot buyback program that is ongoing. We have 60% to 70% already [indiscernible] when we met that with the dividend proposed, we talked about total shareholder remuneration of 2% of the medic [indiscernible]. That's part of the policy. We understand that the buyback is shareholders remunerate.
And in the share price performance, aboard with the company's operating efficiency despite the market being a little complicated, we believe that this is the best capital allocation. And how [indiscernible] the decision was made retain a little, not pay [ 30% ] but to accelerate the buyback.
To your first question regarding cash generation, [BRL 500 million ] [indiscernible] kind of half it is the biomethane project, biomethane project gives us an EBIT of about BRL 40 million, and this is a project -- [indiscernible] leveraged with [indiscernible] compared to the market so that it makes sense and we're going to have return on the project. Without these funding conditions, we would not be able to make the project viable. Of course at market costs [indiscernible] -- we have reduced all the biomethane [indiscernible].
So this is a project that is 1/3 sold in return, leverage return will be above 30% to 35%. The other half can be broken down into BRL 150 million approximately for the sugar project. We are removing the [indiscernible]. So we have higher share of [indiscernible] the mix the next study, in the next crop season. And so my [indiscernible] during the mix. So a look at last year, we had a sugar [indiscernible] 100% above [indiscernible] price for this year. [indiscernible] between 30 and [indiscernible] project for exploring [indiscernible] efficiency in terms of diesel consumption. 40% of diesel consumption, any cost reduction in terms of rate with this, [ in the case of the 2 roster ]. -- we have loan facilities of [ PN around 8% ] depending on the press and ethanol price assumptions.
Next question Mr. Gabriel Barra with Citi.
[indiscernible] but this seems to be a very interesting business for the company in terms of new and production for the future years. Could you elaborate more in terms of deployment, [indiscernible] yield and the interval of planting. If you can elaborate that would be interesting. And my second question. [indiscernible] quarter, there was a discussion of [indiscernible]. And then discussions went back and [indiscernible] my question is regarding the risk -- the government is trying to increase their access and I'd like to hear about a risk both and not dispatching increase impact in your industry? Do you believe that these are material risks I'd like to hear you on your own [ protection ].
Regarding to [indiscernible] yes. It will perform for compaction as part of the return of the project. We do not [indiscernible].
Our next question comes from Mr. Luiz Carvalho from UBS.
Felipe, I would like to relate to capital allocation again. I think you already talked about the projects, but I would like to have a better understanding now that some of your projects have been concluded. And there was a recovery of the ethanol business, as you said. I would just like to understand better in terms of capital allocation going forward. I would say, in the next 12 to 24 months. The second point is about the weather of the past 2 weeks. It's been much drier than the ideal climate. Do you think that this environment is already contemplated in your scenario and how much of that represents a risk in the guidance you gave us.
Luiz, I have some questions. I will start with the second question. Yes, this drought scenario of 45 days with no rain is already included in the guidance. We probably in the next 70 days, we are not anticipating any rain. There should be some rain at the end of the season only. But rain at the end of the season, it does not improve the current season. It only impacts the next coming season. That's the cane that I'm planting today that should be getting some rain in the midst of September and early October. Now related to your first question about capital allocation, all the large projects I had have been already announced, sugar, biomethane.
Today, we were looking at the expansion of corn-based ethanol at Boa Vista. As we said, it is possible, I mean, we have energy available in the unit to have another plant, the same size I have to add additional corn tons at Boa Vista. And so this is the project that maybe would make sense for us to invest.
But even before the decision, the decision -- probably should come by the end of the season. We are initiating the studies for the Unit 1 and 2, and we're just tracking the [ SNO ] market dynamics. I would say that if the ethanol market hasn't been as erratic as it was last year, where for several months it operated at 60% of parity without any reaction, probably we would be able to make another effective decision to double our ethanol plant. But the way things were we decided to wait for a while to check on the consumer behavior in the next coming months to see, in fact, whether we will make a decision whether we will go ahead or not in the second phase.
The fact is that corn around BRL 45 per bag, which is the current price in the Goiás region. This is a very attractive project. If you look at current ethanol prices because return on capital is quite reasonable, but this is a decision that we will make only by the end of the year.
Our next question comes from Mr. Pedro Fonseca from XP Investments.
I would like to hear more about corn-based ethanol. If you can share with us an upgrade in terms of your inventory information and what kind of opportunities you anticipate for corn prices even considering the next crop season, the off-season crop or Safrina inventories in the domestic market, what do you anticipate for the corn market?
And still speaking about corn-based ethanol, can you tell us what is your view about the DDGS market? We are seeing some investments in corn based ethanol. The DDGS supply is increasing in the country. Do you see any risk in this regard and whether you are looking at some pricing for distribution channels or maybe to open an export channel. On that same note, on corn based, ethanol, you talked about return on the investment at corn at BRL 45 per bag. What is the return that you anticipate? This is a line that we got from what you said when you refer to a very erratic ethanol market. So these are my questions.
Well, thank you for your questions. I mean, corn inventory information today, in terms of purchasing, we still have to purchase about 150,000 tons of corn until the end of this crop season. We could even buy an additional 5,000 tons. So in fact, the yield in the region was quite good. We are seeing that prices are at a very attractive level. So if the level remains at 40 to 45, we will have full inventory. I have a static capacity of 250,000 tons of corn in 2 warehouses so that we could have good inventory when we go over to the next season at a lower price for next season when compared to the current prices of corn.
The second question about the DDGS market. In fact, there is a new DDGS supplier because there is a huge number of corn-based ethanol -- once you look at what happened in the past few years. And in addition to that, there is the price of soybean meal, so DDGS and soybean meal, are competitors. If you look at the amount of protein. So we are looking at some export channels.
The market is not yet open or not yet developed. So we are working on that. So for now, we are selling to the domestic market. But from the initial project, we see the DDGS prices that are between 10% to 15% lower than what was initially anticipated. And on the other hand, corn prices are also -- are also lower. So one thing compensates for the other. But in fact, there is a large volume of DDGS and the soy prices are also down, and it's a big competitor in this market.
And finally, about corn returns. I would rather not give you a lot of details because we are now evaluating CapEx and CapEx is quite different if you think it strategically. If you have to do ethanol tanking and buy corn, CapEx may vary between 20% to 30%. But if I give you a number of return you may hear from other companies totally different numbers. But maybe their assumptions are different because maybe they do not need to store ethanol. The fact of the matter is that given current prices, the project would give good returns. But I think we still have to wait and see the performance of ethanol prices and how these prices will evolve in the next coming years.
Corn based ethanol, we are producing -- it's part of our [indiscernible] project, our first plant. So any investment in corn-based ethanol today, it would require last years to produce, and the return certainly is lower as well when compared to other plants. So maybe capital allocation today, the best thing would be to rebuy shares rather than to do the investment. But until the end of the year or maybe next year, we will make some decisions to that end.
[indiscernible].
Still like to ask about ethanol [indiscernible] low selling price in sugar equivalent [indiscernible].
[indiscernible] and the share 100% in high [indiscernible].
[Operator Instructions] [indiscernible] Q&A session. I would like to turn the floor back to Mr. Felipe Vicchiato for his final statement.
Thank you all for joining us [indiscernible] conference call. [indiscernible].
[indiscernible] Thank you all for participating, and have a good day.
[Statements in English on this transcript were
spoken by an interpreter present on the live call.]