São Martinho S.A. (SMTO3) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to the Sao Martinho S.A. conference call to discuss the results for the first quarter -- the second quarter, rather, of the '26-'27 crop year. With us today are Mr. Felipe Vicchiato, CFO and IR Officer; John Graham, the Head of IR, and the Investor Relations team of Sao Martinho. The audio and slides of this conference call are being broadcast simultaneously over the web at www.saomartinho.com.br/ir. [Operator Instructions] Please be advised that certain information contained in this conference call may contain forward-looking statements. 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. I would like to turn the floor to Mr. Felipe Vicchiato, who will begin the presentation. Thank you.

Good afternoon, everyone. Thank you for attending Sao Martinho's conference call. Let's begin with the proposed agenda for the discussion. We're going to begin by talking a little bit about the material fact we released yesterday, the guidance update that I think is the main topic here in the release in terms of news. As every sector, we are struggling from the rainfall completely out of season due to the El Nino. When you look at the 3-month window going back, we did not imagine that these rains would have this amount and recurrence. And with that, the mills go and stop with a lot less TRS than expected. With that, we have a smaller crushing amount. And even with this smaller amount, it will be crushing not as material as what the guidance was. But the big point here will be precisely affecting TRS. TRS was 7%, 7.3% less than what we estimated. We intend to expand crushing until mid-December. That's the best estimate we have today. Of course, if we realize that December, the rainfall is continuing and not stopping, we'll make the decision probably to stop in December because then, it's completely unfeasible for us to have this production. It's even anti-economical, but the initial plan as of now is to continue crushing until December, considering the current forecast that may be a brief out of season summer between November and December, so we're going to keep going. But the TRS is the main highlight here in this break of this decline of 7% due to the rainfall, which led us to have a decline of the produced TRS by almost 11%. This number has been reviewed internally to the company over the last 2 months. Every week that the rain kept falling, we find this number and review and understand if this number can be recovered or not. And looking forward now, at the end of the crop, but maybe even worse. And right now, we will not be able to recover. So this is the best number we are able to share with you today. It's an important break. We never experienced such a heavy El Nino. I think the last data was 1948, if I'm not mistaken, from the agricultural team, we got this information. And with that, obviously, the entire system has been less sugar. We estimate it's going to be around 36 million, 37 million tons of sugar. And less ethanol, helping the product prices of sugar is already going up a little. And we took advantage of this price increase to do some hedging for our release. We're going to talk a little bit about this a bit later. And on the case of ethanol, the last few months also had a good recovery combined to all of the government decisions, and we are seeing a good recovery of the price of ethanol, which helps improve the profitability of the product. But this decrease is still quite relevant and led our margin both for sugar and ethanol to be negative. The margin for sugar was negative, mostly due to hedging that was done last year. A year ago, the price in BRLs was very low, combined with a very high cost, so the margin was negative. But ethanol itself, it's still because the price was still rising and took all of those rise and with the high cost that led the margin to be negative. To give you an idea, when we compare the half year, the crushing of the half year that we also released, it's also in our release. The TRS break is 4.2% only. So in September, we're talking about 2 months back. We were breaking up nearly 4%. And we estimated that we'd even be able to recover that loss to close to 0. And today, it's November 10, and I'm thinking the loss is going to be close to 11 given the amount of rainfall that's been accumulating in October, November, and it doesn't stop. So things are happening very fast. Unfortunately, it's something completely atypical. On the other hand, the productivity of sugarcane to September was close to 86 tons per hectare. We'll close probably close to 88. We're going to have almost 1.5 million tons of cane for the next crop on the stand over. And with this own cane, we'll be able to make a series of adjustments that will be -- bring a lot of cost down for next year. That's what we expect, assuming we have a weather normalcy, but it's not guaranteed. In addition to the production guidance, we also have the CapEx guidance, which we reduced by 1.4%, basically removing BRL 40 million of maintenance CapEx because it would be a change of line since I'm going to increase my crop a little bit, I reduce expenses with the maintenance of the intercrop and increased expenses in crop OpEx. So it's more geography and not a cut of CapEx because we need those funds to continue along with the crop. On the next slide, on the financial results until September, we maintained a pace of sales going strong for sugar and ethanol. Ethanol, we accelerated a little bit more because of this venture. And we had a lot of hydrous ethanol to sell due to a strategy of producing more hydrous ethanol to monetize tax credits. Then the subvention came. It's a good surprise. We accelerated sales. There was a part of about 2 weeks that this didn't catch because it was between the announcement and the signature of the precedence for the subsidy. So we're monitoring it to see, so it's not in the results yet. But in any case, we sold an important volume of ethanol. And the prices continue to climb. And we're going to sell another portion with good prices. For sugar, we took the worst price in BRLs per ton. So the screens that we fixed in the past at smaller prices. And the price went down 30% compared -- on the year-over-year comparison. And for the coming quarters, this is going to be a lot better so that we will close the year with the average price of sugar somewhat close to BRL 1,950, BRL 2,000 per ton. That's our expectation, considering our hedging and what we've sold so far. So that number will be within the average of the year. That's going to be up. The volume went down 11% quarter-over-quarter. So that led the EBIT margin to be but only 5%. There was a significant decrease in financial expenses. We paid some debt that were more expensive, and there's some more -- cheaper especially in the corn-based ethanol that was already financed. So this quarter, we still had a net income of about BRL 50 million. So margin. As I mentioned before, just to reinforce this, there was a significant drop year-over-year on margin. Sugar went minus 6%. Ethanol, also minus 6% year-to-date, which contributed to a decrease on the cash cost of sugar and cash cost of ethanol with the drop of the price on Consecana since the [ fundament went ] down in the last periods of comparison. And here, when we look at the numbers in blue, that's the cost of our own sugarcane, there's the smaller dilution of costs since there is a significant drop in TRS. So the volume, the nominal volume of cost is the same and reducing it in nominal terms, reducing the cost slightly in some lines. But with a smaller production, my denominator is smaller, so we end up having an own cane flow in BRLs per TRS higher. That's what we see for the year. And the unit cost, when we look at the end of the year, the unit cost will go up year-over-year. Why? Because so far, year-to-date, we have minus 4% ATR of the shortfall. And for the year, it's going to be minus 11%, the crop loss. It means that my dilution of cost per unit in the second half will be even worse. So even though in nominal terms, we have the same cost since we're going to have a smaller dilution on the drop of -- and the TRS, this cost will go up. It will be offset on the price of sugar, better price of sugar and ethanol, which should maintain a margin of minus 5%, minus 4%, more or less, depending on the evolution of prices. But the unit cost for the year in the comparison of these half year and what we'll show in the accumulated of the year, this number should go up due to the effect of this additional shortfall of the TRS that we're having compared to the first half of the year. That's going to close for the accumulated for the full year. On the corn operation, it's running well. In the second quarter, we had a decrease in margin, mainly due to a worse average price in the ethanol sales and a cost of higher because of an inventory of corn that was slightly higher. But in year-to-date, it's a healthy revenue, and our investments are happening. It's -- we'll probably stop the cane operation. Now by mid-November, the sugarcane crop is concluded in Boa Vista, the details that Goias had no weather effects or climate events like we had in Sao Paulo. So all of this crop loss that we talked about, 11%, was 100% dedicated in Sao Paulo, nothing in Goias. Goias actually helped improve this average. So just stressing the point about sugar, the shortfall of sugar that we're going to look at, the bulk of sugar is all on the mills in Sao Paulo. So Goias basically didn't have any climate event of this magnitude. So we conclude the crop now at the end of November, and Goias to be able to start the interconnection with the second phase of the corn-based ethanol plant in Boa Vista, that we start to start -- we intend to start operations next year. And according to the time line that we released at the beginning, crushing about 50% to 60% next year. We buy crop -- or corn in the inter crop next year for the inventory, and that's going to be another important factor to increase cash generation and to diversify somewhat the matrix aspect to another raw material that's corn, that doesn't have this weather impact, new product with the [ DG ] being added to the company's revenue, and that's another product with a very interesting margin. Our hedge position today, we're talking about in the '27-'28 crop, the price of BRL 2,200 per ton. At this time, the sugarcane hedge is tied to the dollar and '28-'29, we also did something. We have 270,000 tons, almost at a price of BRL 2,300 per ton That's that for now. We stopped hedging about 2 weeks ago, considering the continuous rainfall, seeing things are getting worse in the Center-South of the country. There's still -- these include here the price at the Center-South, the size of the crop that was expected that was 42. Now the numbers are going down to 37, 36, maybe even 35 depending on when this crop is going to stop. So we stopped hedging a little bit, and let's see where -- or when there will be the downtime of this crop and what's going to be the size of the deficit because of the owning on. India is another important factor for next year because India, the opposite of this, it's very dry. They have not been -- they are not being able to plant in India, and that may have an impact on the next crop. There may be not a lot of sugarcane in India, and that may improve the perspective of price next year, and that would impact the screens of October to March of '28. And the screens of '27-'28, we'll see mostly at the beginning of the crop. And now I want to conclude and open for the Q&A. We have the company's debt. We closed at a net debt of BRL 5.6 billion in September, 1.75x EBITDA. The increase of the debt compared to March year, we can split it in 2 main topics: working capital, which is natural, therefore, the drop. And the corn-based ethanol plant, that's 1 of the investments we're making. Our cash today, BRL 5.1 billion. We are in a liquid position. This cash pays all of the company's debt for the next 3 years. And there's more investment in the corn-based ethanol plant to be made until the end of the crop season. I think there's another BRL 500 million to invest there in the second half. And once these investments made, there's other funds from the BNDES to be released. So we're at a very comfortable position and net of cash to face whatever type of restriction of a higher cost of debt, et cetera. We are at a very comfortable position. We believe that next year, the [ hives ] will be very good. If on the 1 hand, this rainfall has hindered the year, it has left us with a potential of sugarcane fields that's exceptional for next year. Then we'll certainly have close to 25 million tonnes of cane, even more than what we have in the crushing. So with this total sugarcane, we'll be able to do some, it's going to bring my cost down. So now it's a matter of adjusting the operation to see how we can make lemonade with these lemons next year so that we offset this difficult year that El Nino brought us. Thank you for now, and I'm available here.

[Operator Instructions] Our first question, Guilherme Guttilla, BTG.

So from our side, we have a couple of questions. But around the stand over sugar cane, Felipe, that you mentioned a margin of 25 million tons we talked for next year. We're talking about a significant volume. This amount of standover cane that should be lapped. We'd like to understand how your planning is going to be in terms of margin? And the other topic, you mentioned the cost. How the stand over can impact your cost for next year? Will there be an impact or not? And on the same topic, how are you preparing for a possible change in the workweek from 6 workdays versus to now, 5 days? How will that impact your cost? Or how difficult it is going to be for this record crushing you intend to have next year, please?

So when we realized there could be standover cane, we started to plan what sugarcane, we were going to leave standing over. The idea when we have standover cane, kind of bisada is to do it on the area where it would have been reformed or remodeled precisely to remove as little as possible of the sugarcane from the cycle. So basically, today, this 1.5 million tons of sugarcane that are going to be stand over from 1 year to the other are all in areas that I was going to redo on those subsequent years. So what are the impacts? The first important impact is that we'll have less investment in planting next year. I was going to plant in this area, now I won't because they stand overtime. So you can expect lower investments in planting next year. The second impact is in this stand over cane, it's -- it naturally has more -- but has less TRS. So it's going to be harvested probably at the beginning of the harvest, and it's going to be more towards alcohol to ethanol. So it's going to -- this type of sugarcane grows more. It spends longer growing on the field. So it naturally has less TRS. This is the main impact. Obviously, if I had not planned the whole aspect of leaving the stand over cane, which would be the cane in the area was going to plan, that would be a problem because then we lose all of that sugarcane from the cycle. And then it really hinders and gets in the way of the whole plan of the sugarcane field. And that's not what happened. About the work week of 5 working days versus 2 days off, we're studying that here in the company. We have a large team. There are some solutions. They're not homogeneous in the different plants, the solutions. The solutions in addition to this workweek, there's also the number of hours of work per week to try to minimize as much as possible, efficiency and cost. I prefer not to say anything before we get to a permanent solution. As soon as we have a solution agreed on, we'll talk about it, but we're working hard on that. For this year, there won't be a relevant impact because the harvest is getting close to the end, and it's going to be valid now starting on December 16, right? This new work week, 5 by 2. And that's basically when the crop is going to be ending. And in the intercrop, we're able to organize better the scaled on the schedule, and it's less problematic. And there's some time there from December to March or April on the inter crop for us to be able to organize and get a better response to give you more, sort of.

Next question, [ Peter Mene ], XP.

I have 1 about hedge. You have about 700,000 crops of '27-'28 crop year fixed [ 2.2,000 ] per ton. What level of hedging do you plan? And this tends overcame? Does it change your position about this level of price?

Peter, the stand over cane doesn't change anything in the hedging because the standover cane does not mean I have more sugarcane. The stand over cane, it's the same sugarcane, which grew a little bit more. Oh, you have 1.5 million tons of standover cane. It doesn't mean we're going to have an additional 1.5 million tons or any other plant. It's not adding all of the standover cane of all the plants that are going to be renovated at the end of the crop. So the sector is going to have a huge amount of sugarcane because there's a lot of standover cane. Just to make it clear, it's the same area. The sugarcane is going to grow a little bit more because it's going to continue there, planted. So the hedging, it depends on the overall crop, how much I intend to have in hedging at the end of the day with a crop. We get to a point by mid-October, maybe November, where we have 100% of the own sugarcane hedged, and it depends a lot about the time. What we can say is that we already have a reasonable amount of the own sugarcane hedged at a reasonable price, reducing our exposure. And let's see, let's see how it's going to behave. The El Nino effect in India, there will be some time for us to decide whether or not to accelerate.

Now, Matheus Enfeldt from UBS.

I have 2.5 here. And the first 1 is about the diversification of ethanol. I know it's difficult to do that directly. But when I compare your pricing, the average ethanol pricing versus [ Paline ], it seems that this was 1 of the lowest percentage reached in the pricing on your average price. I'd like to understand if there was any difference in the dynamics or maybe a concentration that prevents you from looking at the quarter's average price, a different discount or any effect of the subsidy that is now included here? That's my first question. And the second, maybe [ success all ] thinking about the strategy, the crop, we're going through the second year with a price volatility that is quite crazy. Even the price of sugar, we had months of very fat performances. And my question is about how this changes your process of thinking about the price of sale strategy hedging if that goes in and how you think about the pricing going forward, considering this higher volatility level of the last 2 years? And a quick follow-up of a comment on the cost for this crop. I think we discussed minus 10. And now a comment of it being more similar to the previous crop. How much -- is it less dilution? Are you diluting a total cost at a lower TRS? And how much of it is due the rainfall and the downtime of the plants? And you end up having a one-off cost of the downtimes, stoppages. And that ends up having a higher cost. That's it.

About pricing of ethanol this quarter. The average price you see there already includes 100% of the subsidy. What happens is what I said, there's a window there of 10, 15 days, where the government announced the subsidy. We sold the hydrous product. And between the announcement and the signing by the president, the government kind of forgot this period, right? And there was no subsidies. So there's a discussion there of BRL 40 million that would be our right because we sold -- they announced it, and we sold. So it's a discussion. But maybe excluding that, it would be the aspect of the days or the weeks. As it happens, we had a relevant production of ethanol to sell. We had sold ethanol in the first quarter, concentrated mostly in the first few weeks of April when the price was good. Then ethanol dropped steeply. You remember, it got to close to BRL 2,000. When the government announced the benefit of this subsidy for the price of ethanol go up, given the size of the offer, the supply that was going to exist because until then, we didn't know that the production of ethanol was going to have such shortfall due to the rains. But we started to sell. Maybe we accelerated in the month where the price was still rising. Maybe that's why it's slightly below because we don't have the years out comparison here in the detail. I can have a look later and tell you that's it. I mean, it's risk mitigation. After the second week of April, we didn't ask anything, the price had gone down too much. And whilst the price started to improve a little bit, we started to sell. The second question on the volatility strategy, the speed at the price of sugar, sometimes the volatility is bigger or smaller. I think actually, in the last 2, 3 years, it's been higher. We always try to look at the volatility, always considering contribution margin. We're looking at the contribution margin with the sale, and accelerating more or less. But I'd say it didn't change our mindset. We look a little bit at what the cost estimates will be and the estimate of the crop. And a reduction of TRS risk, but there's a lot of ethanol. What it means is that if you sell -- or the more you sell sugar ahead of time, you hedge to have the crop. For 60% of the sugar crop, there's a lot of it hedged. Or the total TRS, there's not as much hedged because your exposure in ethanol -- it's something that you cannot hedge. And maybe advancing the hedging of sugar because it's a market where is it possible to have the liquidity, it may be a way to go. And finally, in the dilution, I think there are 2 points. The majority or the bulk of the increase in the unit cost that should happen will be due to the dilution of fixed costs. So a smaller production and a decrease in production will decrease -- have a decrease in production of 11%, and that's an important part. The other part is when you have a crop where you stop and go, you start and you crush. And then the other day, it rains. And then it rains, and you have your structure at a standstill. And then it's a little bit dry, let's start over. Once you start again, you have to fire the boiler. There's a lot of influence in the crusher. So you need to -- there's more costs. The extraction is worse, the efficiency is not as right. And all of that make things worse, and that increases your cost a little bit. So it's another factor to make it -- or make this cost structure more complicated. What we were estimating that was going to be the appreciation last year in practice, it's going to be an increase because this whole CRS was very relevant.

Excellent. Just 1 about, Felipe, when you talk about the increase -- it's low single digits, so relatively small? Or there's any concern of that being at a higher level?

Actually, it depends on the product. If you exclude Consecana, it's going to increase 5%, 6% more or less, ex Consecana.

Now Henrique Brustolin from BBI.

I'd like to check that I understood. If you can help us understand how to think about the current price of ethanol because there were a lot of things happening over the year. The starting points that I wanted to propose was that we saw price, as you said, reacting well for this end of crop year. A lot less supply demand going up. So we see that prices of the hydrous ethanol pollen close to BRL 3,000 per cubic meter. And then my understanding is that with the subsidiary, the way it should be today, you would have an additional BRL 0.43 per liter that should come in. So just to understand if this price of 3.4, would the subsidy makes sense? And the other on this point is how the monetization mechanism of the subsidiary should work? So if you already are receiving the payment, is that already becoming a cash base? Or what's the expectation to monetize it? And also along these lines, and that initial comment. I understand that your unit cost in the second half of the crop should be -- crop year should be a lot worse due to the dilution. But if we're talking about an increase in the price of ethanol of this magnitude, wouldn't it make sense to expect some margin expansion compared to the quarter, considering for the second half of the crop year?

Brustolin, thank you for the questions. As for the subsidy, what we're seeing is that the value of the amount is approximately -- you said BRL 400?