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

Good afternoon, ladies and gentlemen. Welcome to Jalles' conference call to discuss the results of the first quarter of crop year 2025/2026. 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 answered during the call will be answered later by the company's IR team. This is the first crop year 2025 and 2026, and the earnings release can be found on the company's website. Before proceeding, I'd like to mention that any statements that are made during the conference related to the company's business projects or forecasts, operating and financial targets relate to the company's beliefs at this time, and they are subject to changes due to macroeconomic conditions, market risks and other factors. With us today, Rodrigo Penna Siqueira, our CFO and IRO. Mr. Penna, please.

Good afternoon, everyone. I'm very happy to be here on another conference call with our investors and analysts. Thank you all for joining. This first quarter and the crop year 2025/2026 started with less yield. We will talk a little about that. We had given guidance about that already. There was a 4% failure in comparison to what we had expected at the beginning of the crop year. The guidance was published in June -- at the start of June, and we expected some improvement after the third part of the crop had been covered. We published a material fact last night. So we have 5.4% lower than the guidance in June and 10% lower than the average crop yield we would expect. We will go into more details. There was an impact from organics. We'll also talk about the tariffs and how we're mitigating this in Jalles. So we'll look at the market perspectives, then we'll talk about the operating highlights, and we'll talk about the guidance and the Trump tariffs from the United States. When we look at the world sugar balance, we have the latest figures from DATAGRO on the screen. One of our Board members is part of the -- or is the President of DATAGRO, and we always take his opinion in high -- in consideration. So there is a drop now, but we expect an increase for the coming crop. That's why we see a bit more pressure in prices this year. So why are we going from [ 5.5 million ] deficit to [ 0.8 million ] surplus in '25/'26. Well, that is the increase in yield in India. They had a crop failure last year. So it's a 21% increase. Thailand is also increasing their yield. European Union decreased it. And Brazil expects to increase it in 1.1 million. We continue to see 6.6 million tonnes in crushing. TRS has reduced in the Center-South. And if yield doesn't go back up, the Center-South crushing figures should also go down. It's likely that, that will happen. When we speak to our peers and consultants in the segment, we see that this is constant that yields are lower. We have 55% of the crop already. We reviewed it at the end of last week, and that's what we published in the material fact. So in Brazil, Center-South, we understand that this sugar production of 41.3 million could -- or million tons could reduce. It could go down. If we look at the historical figures from 2013 to 2014, we are at one of the lowest points. So we believe it's likely that prices will increase from here. When we look at the ethanol supply balance sheet in Center-South region, we've had 34.9 billion liters produced in the previous crop year. Sugarcane ethanol is expected to have 3.2 billion in reduction. Some of this ethanol is being used to produce sugar. We have more sugar in our mix. Corn ethanol should add another 2 billion liters in the market. The auto cycle is very similar to the GDP, 700 million liters. And the mix with E30 started in August, and it goes from August to March. So we expect this impact of 746 million. So when you adjust it as per the auto cycle, we see a 2.6 million liters reduction. So it's the same scenario as we had in the last call. Supply is tight, and we expect better parity in the course of the crop year. We always look at the São Paulo market. It's the main price setter. And we expect this parity to get to 71%. This is the curve published by SCA. This is a society that markets ethanol for many plants in the Center-South. It's not our own forecast. So the price is currently at about BRL 32.0. It should go above or close to BRL 350. And there should be no increase or decrease from Petrobras. So it's a positive scenario for ethanol in the course of this year. And to conclude the market perspective section, we wanted to produce a benchmark produced by CTC: 175 plants in Center-South, 19 in Goiás and 22 in Minas Gerais. So this really shows what's going on when it comes to productivity in the Center-South. When we look at Goiás, we see that the CTC sample is from April to June. So the sample from CTC is April to June, which is the same as number. So we see 3.9% in TRS. The drop in Minas is smaller than in Goiás. Jalles and UOL are dropping 14%. One of the advantages that we have at Jalles is irrigation. Irrigation can always mitigate the impact of weather events. And at Jalles, we see a bigger impact on yield because half of the sugarcane crop is organic, and it was the perfect storm for organic last year. We can't use anything chemical to fight any weeds. And last year, there was a drought and then a lot of rainfall in September and October, and we didn't have the chance to weed the field. So there was a lot of weed competition, and that impacted the development of the organic sugarcane crop. When we look at Minas Gerais, we see that the TRS has gone down. And the TRS product, when you produce ethanol, it's normally privileged. It's the conversion of the ethanol product into TRS. It gets better when you produce TRS. So the TRS field only went down a little bit here. We have the effect of the mix. And the TCH has an impact here in this first quarter, and we had 0.9% better than last year. So when we look at our highlights in operations, harvested area is very close, only 2% down, but grinding or crushing is 10% down. That is due to the yield impact. We had to reduce our crushing speed. And this also impacts the cost of sugarcane -- sorry, not the cost of the sugarcane, but the cost of the product because you're diluting, you're watering down the fixed costs. TCH dropped by 8.4% year-on-year, and that's also an impact that we have on cost. If the TRS is lower, you produce less sugar and ethanol from the same sugarcane. So the speed of crushing with lower TCH and lower TRS all lead to a higher cost in the first quarter. Then we have TCH per plant. I'm not going to go into the details. And when we look at the TRS per hectare, it dropped by almost 12%. The average TRS is almost 3% down. And when we look at the data from CTC for the Center-South, from April to June, there was a TCH decrease of 11% and a 4% decrease in TRS. When we look at the production mix, we had an improvement here. Santa Vitória has had a sugar factory from the start of this crop year. So it is producing as expected. It's running really well. And there's a mix that is going to be smaller now because at Jalles, when we're producing conventional sugar, anhydrous ethanol is paying better than sugar. So it pays off not to produce sugar, but to produce anhydrous ethanol. So at Jalles, we're not going to have that mix of [ 60 ] that we had thought originally because we are favoring anhydrous ethanol and the conventional sugarcane crushing. The average year -- or the average age rather is 2.6 years. I'll talk a little bit about the ethanol prices and sugar prices. Sugar price was slightly higher than last year. Conventional sugar has gone down, but we had more organic sugar in this quarter. So the average price was better than what we had last year. When we look at ethanol, there's a rise of 15.9% in price. The volumes also climbed up. We have sold 67% of the TRS produced in the quarter, combining sugar and ethanol, and 40.4% of the mix was sugar. The ethanol stock is low. And the sugar stock is higher, also due to the fact that Santa Vitória now produces sugar and it didn't in the past. Adjusted EBIT was 3.8% in comparison to 16.8%. And we have a hedge liquidated. So this would be a bit higher if we adjusted that as per this factor, considering the liquidated commodity hedge. Adjusted EBITDA was BRL 53.4 million, and we had a loss of BRL 14 million this quarter. As for the financial highlights, when we look at hedge and derivatives to the right, we can see that sugar had a substantial impact. The market prices have gone down and our prices set up here. And when we look at the curves in June, we have IPCA or the CPI, the consumer price index, and in the 10-year rate, it climbed down from [ 7.6 to 7.2 ]. In spite of this positive impact on the financial side, we normally have a point that offsets it. Commodity derivatives may be negative in the market, but the biological is positive. So when one is positive, the other is negative. Our biological product was [ 170 ] negative in the quarter because of the sugar and ethanol prices that have this impact. Indebtedness was BRL 1,850 million, 6% higher than the previous year. We have BRL 1.5 billion in cash. So it's a comfortable position. The average debt term is 4.7. And this will cover amortization up to '29/'30, crop year '29/'30. So the debt is well covered. As for hedging, 90% of the crop is sold forward. The next one is 74% sold, and the next one is 22%. And we can see the prices here are BRL 2.431, BRL 2.475 and BRL 2.533. All of them are above the historical average. So from our sugar production capacity, conventional sugar, we have [ 1.32 ] crops sold forward. I mentioned production costs when we talked about TCH and TRS, sugarcane production per hectare, TRS and lower crushing levels. That had a direct impact on the accounting costs. So we see a rise here of 18.4%. When we look at the cash perspective, where we remove any depreciation and you add what you've invested in crop management and crop maintenance and planting, then we had a 1% decrease. And because of the increase of the dollar against the real, then we have a 9% change here in the exchange rate. We don't expect to have the rainfall now, and we see the increase that we had in the plants that impacted the shorter off-season. So this is a trend to go down. Now, speaking about the tariffs, this is bad news for Jalles. The organic market is important to us. The United States accounted for 6% of our total sales last year. And that makes Brazilian sugar less competitive in comparison to the main global players. Brazil is the largest global player in organic sugar. So, that has an impact on investments in long-term growth when it comes to this product where we are leaders. I hope that this changes, if not this year, next year. You can see this chart at the bottom, and Brazil accounts for 46% of the sugar imported from the United States, and they can't find it anywhere else. And they would only not have a problem if soda pop and sweets stopped buying the sugar. And organic market has a trend to go up in pricing, different to conventional sugar. The pricing of organic sugar and conventional sugar, they're completely independent from one another. And we've seen so far that customers continue to buy it, even though they have to pay these tariffs. Of course, in the long run, this is negative because the other players will have the incentive to produce more. This may change in the future, right? The impact we expect this year is a drop from 15,000 tonnes to 20,000 tonnes. The United States is 6% of our organic sugar, and that has an impact of BRL 20 million, BRL 25 million on our cash. I'm talking about the guidance now. I already mentioned earlier. So we reduced by 5.4% our expectation in yield this year in comparison to the previous guidance. This is 10% lower than what we had expected for the original forecast. That was almost [ 870 ], if I'm not mistaken. From the installed capacity, we'll only be using 83.5% with a productivity of [ 80% ] per plant. And our TRS would drop 1.6%, following the Center-South trend, but not so intensely. And the production mix, we have 54% for sugar because the anhydrous ethanol is more advantageous than conventional sugar. So when we're not producing organic sugarcane, then we're focusing on anhydrous ethanol that has been yielding better results than sugar. Considering the challenging scenario, what are we doing with the impact on free cash flow and whatnot? The guidance that we had published originally already showed a BRL 40 million drop in CapEx. This would lead to no problem if we leave it for later. And we have some improvements in CTT, right, harvest transshipment and transport. We have made changes in concept and other changes. So this would lead to replacing harvesters less often. And we have reduced another BRL 51 million here in crop management and CapEx. So from the guidance that we give, we have calculated some reductions that are not going to be enough to offset the whole loss, but that can mitigate it partially. The company has been having a number of meetings in all departments, agricultural, financial, all of them, to try and find more efficiency in every possibility. That was what we had for you. We have 30 minutes for the questions now. Our COO, Joel Soares, is also next to me and available to answer your questions. All right. Thank you very much, everyone, and let's start the Q&A.

[Operator Instructions] Gabriel Barra from Citi would like to ask a question.

I've got a couple of questions actually. You started talking about the macroeconomic scenario. And one of the points we've been discussing with investors is this sort of dual scenario, right? Some consultants speak about a stronger yield or production, and we see the companies at the same time struggling to even keep to the guidance levels as you have just shown us. So you're below the guidance levels. And this also applies to other companies with the sugarcane also being harmed by the fires from last year. And this focus on ethanol in the mix, right, we didn't quite expect that to happen so early. And that also puts more -- has more pressure regarding the oil prices. How can we reconcile these aspects? We see that companies are struggling with more ethanol-based mix, and the market wants sugar as well. And second question has to do with the strategy. You mentioned that the scenario may be better for ethanol. And not only you, but other companies are focusing more on ethanol. But when I look at the stock levels, it's a bit tighter. It's not -- there isn't much of a buffer. Also, the interest rates are higher, and there is a bit more uncertainty. These are my questions.

Thank you, Gabriel. Thank you for joining our call. Well, let's start with the mix. Is my connection breaking up?

I can hear you well, Rodrigo. Yes, I can hear you well.

Just a moment, please. Can you hear me, Gabriel?

Yes, I can hear you.

Okay. All right. So starting with the question about mix. In Goiás, we have an advantage with anhydrous ethanol, and we do financial hedging. So you can revert the hedge. If ethanol is doing better than sugar, you can just revert it without any extra cost, and you can use the strategy better of shifting towards ethanol. We win, right, with the sugar going down and with the premium with the spot sugar. So this is not general. I am saying this because this is not something that every plant can do. São Paulo, again, is a price setter, and it's better to do sugar than ethanol. And Mato Grosso do Sul, you may have an advantage there with ethanol for some plants, but it's not quite general. Santa Vitória continues to produce as much sugar as possible, and Otávio Lage also only does hydrous ethanol. So it's better to make sugar. So it's just a disclaimer that this applies specifically to anhydrous ethanol. And we can maneuver our hedge if the situation favors us. And we're looking at market prices, constantly comparing to carryover sugar and ethanol, and ethanol in the future. With the increase there was recently, we sold some. We had stopped selling ethanol for a while to leave about 50% of the ethanol produced to be sold in the off-season. But this is very dynamic, and it changes all the time, and we need to analyze it all the time. Now, an important point is that with this expectation of lower crushing level in Brazil and lower ATR -- pardon me, TRS, with the exception of Mato Grosso, and Mato Grosso do Sul and Paraná, where we have less impact, and they're not the largest producers, right? The largest is São Paulo, and then Minas and Goiás ranked second and third, sort of fighting for the second or third position. So we see an impact here, TCH and ATR -- or TRS, pardon me. So we believe that sugar is at the lowest price. We don't really expect that it would go down any further, and we expect it should start going up, following this trend here in the Brazilian market in the Center-South. Did I answer your question satisfactorily? If I didn't, please let me know. You can ask questions, of course.

It was very clear, Rodrigo.

Henrique Brustolin from Bradesco BBI will ask the next question.

My first question is for you, Joel. The yield being lower is something that Rodrigo already explained to a certain extent. But when you look forward, how comfortable are you regarding your recovery for the coming years? Also considering that the climate or weather isn't an issue, what would the expected curve be for the 9 million tonnes expected for the coming year and also for the next crop year? If there's any approach in the -- or any situation rather in any of the plants that would cause the recovery to be harder if you think of, say, the organic sugarcane field, if it's going to be more impacted than something else, just for an example? And Rodrigo, I wanted to understand the situation with the organic sugar a bit better. You mentioned the 20 million to 25 million difference. Does that come from that 15,000 tonnes to 20,000 tonnes that are redirected? Or is there anything here related to lower pricing for the rest of the crop year? So what have you seen when it comes to marketing organic sugar and what is expected in the pricing dynamics?

Hello, everyone. Thank you for your question, Brustolin. The whole sector was surprised by the weather issues, so excessive rainfall and less sunlight. And then, February and March, there was an intense drought. We'd like to say that the distribution of rainfall and balanced weather, when it comes to humidity and temperature, et cetera, this is what matters. But we were all in a similar situation here. For the next crop year, we, of course, have been investing more and more in varied technologies. And this applies to the medium to long term. We'd also -- we've also invested in irrigation to mitigate the climate issues, also when it comes to rainfall-related destruction. And on our premises, wherever we have irrigation, we see a more balanced yield. So with all of the measures we have taken with all of the approaches, be it pivot or be it salvage irrigation, we have another project of 700 hectares that is already planted with different sorts for this management, this irrigation-based management. So we want to, of course, use the sorts that will respond best to water. And crop management is basically mechanical in these areas. And whenever there is a rain or intense rain, and often that happens in October, we can't go into these areas. But as soon as we have the chance at the end of the rain period, I mean, when that happens, we have better conditions to work. And we believe, for the next crop year, we'll see a substantial recovery in the 3 plants.

Thank you, Joel, for that answer. Brustolin, if something is unclear, just let us know. Now, let's understand the impact on organic sugar. This range from 20 million to 25 million tons fewer that are not going to be sold as sugar, and they're going to be redirected to ethanol and anhydrous ethanol, maximizing the level of anhydrous ethanol. But the good news is -- and I mean, today, we heard that customers are not going to change their contracts. They are not going to have more, but they're not reducing either. And this is such a major change and such a sudden change. So it's still unfolding. So maybe this 50% tariff will change and it will go back. So there's a lot to happen still. But it would have this volume from 15,000 tonnes to 20,000 tonnes. And the organic sugarcane, we're having the impact with lower yield. And it's a shame that we're transferring it to lower value-added products. So that's why we see this impact.

And Joel, if I may ask a follow-up question about the yield. To get to the 9 million, that looks challenging for next year, so maybe we'll achieve it in 2 years. Will this difference already come next year, and then '27/'28 would have an addition to the 9 million? Or should we consider something that will rise slowly but surely and get there in 2 years?

It's very early to tell. We depend on the weather. The company is ready for this production of sugarcane. We have well-nurtured sugarcane fields. We have the right planted surface, and we really have everything we need to produce the sugarcane. And now, this period that's coming to an end with 1.5 months, we're going to add 3,000 hectares in Santa Vitória and Otávio Lage. And in the coming years, we can ramp up growth again and have a chance to fill up these plants, right? So this is what we're pursuing. And again, we have everything we need for it: activities, technology, the work to increase yield and productivity. Well, we're doing it. Generally speaking, of course, we really depend on the weather balance, the whole of agriculture does, so that we can get there faster. But we are considering something around the deadline that you mentioned.

Pedro Fonseca from XP has a question.