Jalles Machado S/A (JALL3) Earnings Call Transcript & Summary

Good afternoon, and welcome to Jalles conference call to discuss the results of the third quarter of crop year 2024-'25. This conference is being recorded and has simultaneous translation into English. The replay will be available in both languages at the company's website at ri.jalles.com. [Operator Instructions] As we have limited time in this conference, any questions that are not addressed during the call will be answered later by the company's Investor Relations team. The earnings release and the presentation on the third quarter of crop year 2024-'25 can be accessed on the company's Investor Relations website and also at the CVM's website. Before proceeding, I would like to mention that any statements that may be made during the conference related to the company's business prospects are predictions based on the company's management's expectations about the future of Jalles. Such expectations are subject to change due to macroeconomic conditions, market risks and other factors. Today, with us is Mr. Rodrigo Pena, CFO and IRO. I would like to turn the floor over to Mr. Pena. You may proceed.

Thank you very much, and good afternoon, everybody. I would like to thank you all once again for participating in our earnings call. We're going to talk about the results of the third quarter of crop year '24-'25. During this quarter, our recurring result was positive. But it was affected by the interest rate curve, we're going to give you more color on this later. The swap that we have -- the debt swap that we have had an impact due to the mark-to-market. The result was, however, positive during the quarter, not as much as we expected, but the recurring results were positive, and they have a cash effect. First of all, I would like to show you an overview of the world sugar balance. We are using Datagro's data as of February 2025. The crop year '24-'25 is coming to an end now with a deficit of 1.7 tons with a 42.9% inventory. And for next crop year starting in October, and of course, it's very early to tell, this is an initial estimate. But if we have good weather conditions, normal weather conditions across all countries, we are going to have a surplus of 3.8, and the stock consumption ratio will be still low if we consider the track record. If we look at the curve since 2012 all the way through 2025-'26, although we are going to have a surplus, we will be at the second lowest inventory level, second only to the current crop year '24-'25. So the market is still impacted, and we had climate volatility all around the world, and this number is considering that everything is going to happen normally. And of course, it can change because we are only going to have the crop year starting in October. Now let's take a look at an overview of the market. We can see the consumption is going up, the monthly consumption. In January, we had a parity of 67% for ethanol. And still, there was a very strong consumption. We believe that our strategy was the correct one of carrying inventory over to sell now in the off-season. We can see that the prices went from BRL 2.60 in '23-'24. And during '24-'25 crop year, it started to recover, reaching BRL 2.80. And in the state of Sao Paulo, we have BRL 3.37 as of February according to SCA's data. SCA is the institute that calculates the forecasts of the company. And for March, the number should be BRL 3.47. And in the second half of January, we had positive numbers. We were actually expecting a lower consumption. The price was already at that level in the second half of January, going from BRL 3.35 to BRL 3.40 in the main consuming places and still consumption was very strong, which is positive. Now on this slide, I would like to show you FGA's overview for the ethanol market. We are going to finish the '24-'25 crop year with a total supply balance, including anhydrous and hydrated ethanol of 34.7 cubic meters. And it is expected for corn ethanol to grow by 2 million -- actually 10 million cubic meters of corn ethanol for the next crop year. However, the mix should lean more towards sugar. The country already has that capacity of producing sugar, since there was an increase in the share of sugar in the mills with the opening of new plants such as ours and new ones being opened this year. So with the mix, with a higher share of sugar, we are going to see a reduction in the production of ethanol by 2.4 million liters. And we also have the auto cycle for ethanol. We would need another 510 million liters in growth to serve the market's demand. So if we compare '25-'26 against '24-'25, we can see that we are going to have about 500 million liters fewer in the market. And if we have an increase in anhydrous ethanol in the mix, and it is likely going to happen because there are studies being conducted, and they will be delivered in March so that this decision can be made. And there is a high likelihood of having a mix of 30% in the next crop year, and that would take 1.2 billion liters being taken from the market. We would need to make up for that because of that increase in the mix. So if we compare the crop year -- the current crop year against the next one, we are going to have 1.6 billion liters less. Now if we look at the average parity, it is going to be about 66% to 67%. And next year, probably the number will be higher than that because the supply of ethanol will be lower, consumption will be strong. So for the next crop year, the ethanol market will have a lower supply of ethanol. And therefore, ethanol prices should be as high as this crop year or a little bit higher. Now E30 is anhydrous ethanol, a 30% mix in gasoline, and that would help this market. And if we don't have it, the numbers will be in line with the previous crop year. Now let me move on to the operating highlights. I would like to show you only the consolidated numbers, the year-to-date numbers. We finished the crop year with 7.9 million tons. Our guidance was higher than that. So there was a lower crushing level than we expected. Our harvested area was higher because the company is expanding, and our average productivity was 84.5. I would like to highlight that the Jalles unit, the biggest one, had a record-breaking productivity of 97.5 in comparison to 90 year-on-year. And the Otavio Lage unit had a decrease from 93 to 90, which we did not expect. And in Santa Vitoria, we had a decrease from 70 to 65, and that is related to the drought that we had in that unit. We didn't have any rains in May and September during the current crop year. So sugarcane was very dry, very much impacted by this drought. And therefore, we have that decrease in the Santa Vitoria unit. Now when we look at the total TRS per hectare, we had 11.9, 2% less year-on-year. TCH was higher, but TRS was lower, it was 3.8% lower year-on-year. So if we look at the big picture, looking at the TRS per hectare, there was a 2% decrease year-on-year, which is also different from our guidance. The production mix, you can see that we made progress. In the Center-South region, we had a decrease. We had over [ 49% ] last year, and we should finish this year with [ 48% ]. Although the number was lower than we expected, we went from [ 38% ] to [ 44% ] with the operations of Santa Vitoria. And the ramp-up in that unit was a bit slower than what the company initially expected. The sugarcane field average age is 3.2 years, same number as last year. Now let me show you some details about weather conditions. In the 3 units, you can see the rainfall that we have had since -- or actually up to January. You can see that at Jalles and Otavio Lage, we had rainfall above the historical average in October. And October is a very important month for us. Last year, we had a surprise of 40-millimeter rain in September last year, which was a positive surprise. And October and December were much better than last year. December is right about at the historical level, but November was better. And in Santa Vitoria, we had many months with the exception of January exceeding the historical levels. So rainfall is playing to our favor here. And it is very important that we have rainfall in April. It's very important for the formation of the next crop. We still have 3 months of rainy weather in the units -- in the state of Goias, 3 months in Santa Vitoria and 2 months in the Goias units. And April -- the month of April is going to be a highlight for us, we expect to have rains during that month. And now let me show you some details about our sales highlights. You can see that the average price was higher and the volume was higher as well with 402 million tons of sugar. Now for ethanol, we went from BRL 2.56 to BRL 2.95, a 15% increase year-on-year, and the volume was stable. And here, you can see our price curve. Contrary to last year, ethanol recovered throughout the crop year, and we are now at our best moment in Sao Paulo. In the state of Goias we are hitting actually the level of 3.38, 3.35. The prices are actually better than the ones that you see on the chart. And there was an increase on the tax on gasoline, which is another advantage for us. And there has been a delay of BRL 0.15 to BRL 0.20 in comparison with the PPI. And Petrobras is not increasing the price of gasoline. If it does, it's going to be an additional factor that is going to help ethanol prices. In the first 9 months of the year, we had a mix of 49.8% of sugar. And we also -- between ethanol and sugar, we have already sold 71% of the entire TRS produced by the company. Our ethanol inventory is at 176 million, flat year-on-year. And our sugar inventory is a little bit higher with 107,000 tons. And organic sugar had a higher inventory carryover because we had a period with less shipping because of the increase in freight prices. In June, that's when the period for selling organic sugar ends, and the price is going to be adjusted to normal levels. Now EBIT in the first 9 months of the crop year, our margin was 19.4%, BRL 326 million, better than last year. And our EBITDA was BRL 950 million against BRL 910 million last year. Our net profit, our result was negative because of the mark-to-market effect. I'm going to touch on that later. On the next slide, actually, here, you can see 2 situations. In December, sugar was at this level and our hedge was at this level. Our sugar hedge is the sum of market-to-market for sugarcane and sugar. Usually, we have 2 operations. We have one for sugar and one for FX. Our mark-to-market, if you add the 2, you are going to have a negative number of almost 70 million. And now sugar is at the level of our hedging. Now the biggest impact of our mark-to-market, and we should remember that we don't do hedge account. And that's one of the reasons why we had a fiscal deterioration in the federal government with the spending package. I'm sure that you are all aware of that, that created a number of different interest rate curves. And since we turned all of our debt indexed to the IPCA inflation rate, we transferred that to the CDI interest rate. But in the second quarter of 2025, the curve was at 6.7%. In the first, it was 6.5%. In the second quarter, it was 6.7%, but then it went up to 8% and then 7.5% in the long-term. And since our debt operations have a maturity of 10 -- 7 to 10 years, we had that change in our curve. And in this quarter alone, we had BRL 90 million of our debt being mark-to-market with a total of BRL 157 million in this quarter. And last year, it was BRL 288 million positive. Now when we look at our cash profit, we had BRL 31 million against BRL 14 million, was a lot better. And that number excludes all of these effects, including biologicals, variation and noncash income tax and also mark-to-market. This has a noncash effect, the BRL 157 million and it caused a significant impact on our net profit. Now let's take a look at our net debt. Our leverage is at 1.3x. Our debt is under control for the next years, with an average term of 4.8 years. Now our hedge price, we have 69% completed for 2026-'27, now for '27-'28 only 1.2% is hedged with [ 2.6% ]. Now let's take a look at our ability to produce sugar, conventional sugar, excluding organic. We have 1.3x crop years of conventional sugar that is hedged, and that gives us a total of 714,000 tons. Now in terms of costs, let's take a look at our production costs. We had a 2% increase in our cost in Brazilian reals. For TRS, there was a decrease of 2%, and cents per pound, it was [ $0.12 ] -- minus [ $0.12 ] because FX went up. But this number is interesting because we expected this to be lower. But since there was a deviation in comparison with our guidance for productivity and also TRS and TCH and tons of TRS per hectare, that had an impact on this number. That's why our production cost was not better. Now very briefly, I would like to show you that we virtually finished the investments in the Jalles and Otavia Lage's units. Now there's just a little bit of investment left in expansion for this year. We also finished the investments in the sugar plant. We spent BRL 8 million more than estimated, but our capacity was 33% higher than we estimated. And with that, I conclude the presentation. I just wanted to give you a brief overview of the quarter. And now we are ready to take your questions.

[Operator Instructions] The first question comes from Mr. Matheus with UBS.

My first question is about your cost -- your cash cost. We had an increase in COGS, in maintenance and personnel. I would like to know how much of that is recurring or how much is related to inflation or how much is nonrecurring because we had a yield that suffered a little bit? So how much of this is recurring? What can we expect in terms of costs going forward? And the second question is about capital allocation. You showed towards the end of the presentation that there is very little left to finish your expansion CapEx plan since the IPO. You still have 9 million tons to get there. But in 2026, you can expect to have higher cash generation, I believe. So I'd like to understand your perspectives for the coming crop year? Maybe your leverage level should go down? What can we expect in terms of capital allocation? You talked about corn, ethanol. If you could make a list of the company's priorities, I know that a decision has not been made yet, but what would your priority list be?

Thank you very much for your questions. Very good ones. Starting with the first one about the cost. We always like to look at the big picture, the crop year as a whole because quarters can bring distortions along with them. And indeed, this quarter, October was very rainy, when we can crush a higher volume. And November started very rainy as well. So although we had lower crushing -- and I didn't mention that in the presentation, but we were not able to crush about 40,000 to 50,000 tons of sugarcane, and we had to push that forward. And that entails higher costs because you have to optimize the equipment and the workforce, and optimization is not that good during harvest and TRS also goes down. It's better to get the sugarcane than not do it, but that causes distortions in the cost. So there was a worse scenario because of the rains in October. At the Jalles unit which had higher production, we didn't have any deviations from the guidance. What we had there was actually an increase. We almost finished our work there on Christmas. We finished our work there, and it was about December 19, 20. So when you look at the recurring CapEx so far, you can see that it went up. During the year we expected the costs to be at about 3%, and it was a little bit higher because of the lower TCH and lower TRS because of the reasons that we mentioned. But yes, this quarter was a one-off situation. And the second question was about capital allocation. As we usually say, we conduct feasibility studies, and we did that for some projects, but they will come in the medium-term because we just finished our investments. We still have a little bit more to invest in our sugarcane in Santa Vitoria and also a little bit in the other units so that we can reach the full capacity across the 3 units. And we don't want to invest right now, if it's going to mean higher leverage. Now it is time for us to harvest and mature our projects. In the short-term, we want to capture the opportunities, and we have a project for that. It's a small project. And now we are assessing a second phase of the project. We want to produce biomethane. And at the Jalles unit, we are considering producing biomethane there in a partnership, with a minority share and lower investments because we think there is synergy with the entire business. But the idea right now is to make the most of our assets. And when we grow you know that with Santa Vitoria, Jalles, Otavia Lages, sometimes things are not so perfect as we want it to be. We just want to fill up the mills at their full capacity and gain more operating efficiency, and also industrial, agricultural efficiency. That's where our focus is.

The next question comes from Mr. Pedro with Bradesco BBI. The next question comes from Mr. Pedro Fonseca from XP.

First question is about your yield, particularly in Santa Vitoria. There was a slide, Slide 9, if I'm not mistaken, showing the rainfall. It's a very good slide. And my question is, what can we expect in terms of recovering yield in Santa Vitoria in the next crop year? And how does that change your ramp-up plan and your goal of reaching 9 million tons of crushing by 2027? And the second question is more structural about your organic sugar business. You said that there is a better outlook for organic sugar, but it's not there yet, and it's been so for a while now. So what do you think from a structural perspective? In the foreseeable future, do you think that things are going to go back to a normal level? Or do you think things will remain tough for organic sugar and maybe that can have an impact on your production mix? Are you discussing that at all of maybe decreasing the production of organic sugar and leaning more towards VHP? Those are my questions.

Thank you, Pedro.Well, at Santa Vitoria, as I said in the presentation, we had impacts from droughts there. In our guidance, we were forecasting higher productivity at 7.1 or 7.2 and we finished with 6.5. So we felt that impact. And last year, it was 70, but that's because we had a very favorable weather. We really didn't expect to reach 70, but the weather helped us. And this year, it should have been a little bit higher than 70, but the weather played against us. It was the exact opposite. And we have that forecast in crop year '26-'27. We want to get close to 80, 79 by '26, '27. That's our target. That's what we are pursuing for Santa Vitoria. And we want to get to the 2.7 million there as well. Now for organic sugar, we don't see a structural problem. What's been happening is related to freight. That's what causes our shipping to be unstable. But really, the market is just as it was last year, but we have not been able to grow. We are stable in the international market. And in the domestic market, we have a lower share. And in the domestic market, we have been able to grow with a bigger share in retail, but it is still the minority. It is only 15% domestic and 85% international. We are not growing at the 7% or 8% that we had in the past, but we are not considering reducing the production of organic sugar. What we want is to continue to grow since this market presents a growth trend going forward. I don't know if I addressed all of your questions.

The next question comes from Mr. Pedro Gama with Citi.

Well, first, I know that you have not published a guidance for the next crop year. What can we expect, however, in qualitative terms? Can we expect the company to reach the 9 million tons in crushing? I imagine that the company is already purchasing inputs. What can we expect in terms of unit prices and also workforce cost? And if you can refresh our memories about the growth plan at Santa Vitoria, what's missing? Do you still plan to increase the planted area? Are you going to use third-party sugarcane? And for capital allocation, what is the target leverage level that you are pursuing?

Thank you very much for your questions. Well, about costs for the next crop year. Because of the FX rate, we thought that the input would be more expensive because the FX was at [ 6.20 ], but now it is back at [ 5.80 ]. So that pressure lifts off the prices of inputs. I believe we're going to see a slight increase in input prices because the average FX rate is a little bit higher than last year. And the input prices, which are usually international, they are the same as they were last year, more or less. It's only the FX rate that impacts us. And workforce, there's a lot of competition. The price should go -- should grow by the inflation here in the state of Goias and in the state of Minas Gerais, there's a lot of competition for workforce right now, and we can see that from our suppliers as well. We know that there's a lot of pressure on workforce. And I think I mentioned that in our previous call, and we can still see that effect right now. But that's pretty much it. We are going to see an increase by inflation, maybe a real increase by 1% or 2% depending on negotiations. But we expect to have productivity that will make up for the weather conditions that we had at Santa Vitoria. We expect that the weather conditions will go back to normal levels in the next crop year. We still have February, March and April rains and also May in the Santa Vitoria unit. And after that, we are going to have a better outlook and a better perspective on what the next crop year will be. Now you also asked a question about our leverage target. We are now finishing an investment cycle, and we want it to be as it is or less. Preferably, it should be 1.3 or less in our debt over EBITDA ratio. Our target is to decrease that a little bit. And actually, the ratio is debt over EBIT. It should be 3, 3.5 or less. And since we are going to have more cash coming from the excess sugarcane, we should take advantage of that now that we have finished the industrial investments. Now the investments that we still have to make, we have to invest in another [ 2,500 ] hectares this year. And we need to reach to the 2.7 million because we are going to have sufficient area to get the crushing level, the crushing volume of 2.7 million tons. Over the past years, we have been replacing the agricultural equipment. Our average age of the equipment in Santa Vitoria was higher with less availability. So we have been working on that as well over the past 2 years. And next year, we should also have some investments in machinery, but they are marginal. They are not substantial. And Matheus asked a question and I think that I did not address it, so I'm going to do it now. He asked what we expect our debt to be like in the next crop year. Since we are going to have lower investment, but we still have to expand our sugarcane field, we believe that our nominal debt will remain flat, but the leverage level will go down because of higher crushing and also lower debt in nominal terms. And if there is a drop, it is going to be small because we still have some investments to make in the sugarcane field and also our machinery in the next crop year. That's it, Pedro. Do you have any other questions?

No, that's clear.

The next question comes from Mr. Pedro Fontana with Bradesco BBI.

Going back to costs, I believe that the factors that impacted this quarter were very clear. I just wanted to ask you about the fourth quarter. Are those effects going to carry over to the fourth quarter? Will unit price increase towards the end of the fiscal year? And another question about ethanol. You said in your presentation that there is a likelihood that E30 will be approved. I would like to know more about that subject. How likely is that to happen in the short or medium-term? Do you think it's going to happen in 2025 or '26?

I'm sorry, my mic was off. Thank you, Pedro, for your questions. Well, about the unit cost for the fourth quarter, since we're not going to have the crop season going anymore, the cost is already what it is. We're not going to see any changes in the fourth quarter because we are not going to have any crushing. We are just going to pack sugarcane -- sugar rather, but it's going to be very little. We are not going to have any changes in the cost. It is what it is. And what's going to happen is that we are going to sell the inventory that we have available. We should keep some inventory for the beginning of the next crop year in April. It's a very small carryover inventory. And as for E30, we have a work group that is running tests. We commissioned tests about the use of E30 in vehicles, and it should be completed in March. After those tests are finished, we are going to talk to the regulatory agencies about the results so that they can make a decision. Since we don't foresee any problems in the tests, there is an expectation in the sector that in April or May, a decision will be made. And we would have, therefore, a 30% mix of anhydrous ethanol in the entire 2025-'26 crop year, which is going to begin in April. And we believe that right in the beginning of April, we're going to have a decision being made by the regulatory agencies, but we have to wait. This is the likely scenario.

The next question comes from Mr. Thiago Duarte with BTG.

It's always great to hear from you around this time of the year and talk about the next crop year. As you said, we still have rains to come in the off-season. And my impression is that part of what you were expecting for '24-'25 will actually materialize in crop year '25-'26 with a mix that is higher in sugar with the plant running at its full capacity. And also thinking about that ladder, that is taking us to higher crushing volumes in Santa Vitoria. Of course, there is -- there are a few things that we cannot predict, for example, the weather conditions. But what can you say in terms of the sugar share in your mix so that you can fulfill what you expected to reach when we had that Jalles Day way back when you acquired Santa Vitoria? So thinking about the next season, do you think there's going to be any reason that is going to cause results to differ from what you expected?

Thank you for your questions. Well, the '24-'25 season in terms of our operations was a little bit short of what we expected for this year. Since the sugarcane plant -- the sugar plant was finished towards the end of June, and that gave us 2 months more than we expected, and our share was [ 44% ] because of that, and we expected it to be [ 50.6% ]. And the entire Center-South region struggled with that because of the quality of the raw material. We felt that in Santa Vitoria because when the plant started to run, the raw material was bad because of the drought and the low TRS. So we struggled because of the quality of the raw material. So we did a few adjustments at the Otavio Lage unit. We went from a mix -- a share of [ 45% ] to [ 60% ], and this year, we were not able to do [ 60% ] because a few things changed in the plant. So it took a while for us to adjust the operations. When you change too many things, there is more chance of things not working as you expected. So to address your question, yes, we believe that next yea we will be able to use our capacity with [ 55% ] to [ 56% ] share across the 3 units. Santa Vitoria with [ 50% ]. That's what we expect to have in the next season. So, Duarte, we are excited. We are now going to make those slight adjustments that we still have to make the most of the assets that we invested in over the past years. And you mentioned that ladder, that's a progress that we expected to have in Santa Vitoria. We had a hiccup there. Unfortunately, weather plays a huge role in our business, and since in Santa Vitoria, we only have irrigation in 1,000 hectares, and it was not working so well. It is now working better. So we have less cushion than we have at Otavio Lage in Jalles, where we can control drought a little bit better, and the drought was very strong there this year -- in the past crop year. So now we think that we are going to be able to follow the plan that we established to get to [ 79 ] in crop year '26-'27.

I don't know if I can ask another question.

Yes, sure.

Well, it was very clear that there was a carryover of your CapEx from one crop year to the next so that you can meet your guidance. And thinking about the previous question, when we look at the next season, it doesn't seem to me that there will be any additional CapEx other than the recurring and the improvement CapEx. Is my understanding correct?

Well, Duarte, we are going to have an improvement CapEx that's going to be a little bit higher than normal because of the updates to the Santa Vitoria machinery. But that's very specific to Santa Vitoria. And for expansion, we still have biological investments. The industrial investments have already been made. And now for this year, we are going to have the [ 2,500 ] hectares -- 2,500 to 3,000 hectares of expansion at Santa Vitoria. And in Jalles and Otavio Lage, we have another 2,000 hectares. That's what we have in terms of expansion. There's nothing left in terms of industrial expansion in our plants. This is not going to be a crop year where we're going to have zero improvement CapEx but -- or expansion CapEx. But for 2027, we are no longer going to have any expansion CapEx. Another point that I would like to add is that we expect the Jalles unit to respond very well to our investments. We went from [ 88 ] to [ 89 ] to [ 97 ]. And at Otavio Lage, it used to be [ 100 ] and it came to [ 90 ] this year. And of course, that there was a natural drop because of the expansion. We are using lands that used to be used for cattle raising, but we expect it to have only 1 to 2 tons of impact. So there's just a minor adjustment that we have to make to reach the yield that we want because our bar, I know, is very high. The Center-South region has a very high average with 78, 79, and that's where we were at. We are actually higher than that. We used to be at 94 and 95 in the 2 Goias units. But of course, we want to grow and grow always because yield is key to have a competitive cost in our sector. That's a restless pursuit of ours.

[Operator Instructions] There are no more questions. so I would like to turn it over to Mr. Pena for his closing remarks. Please go ahead.

Good afternoon. Thank you once again for your participation in our earnings call. We had a great turn up. Thank you so much for keeping in touch with us. And in the next call, we are going to talk about the last quarter in the season. And the ethanol prices are going to be at their highest. And it was a good idea to carry some inventory over to the fourth quarter. Thank you very much, and see you in our next earnings call.

This concludes Jalles's third quarter of crop year '24-'25 for today. Thank you very much. Have a good one.