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

Good afternoon, ladies and gentlemen, and welcome to Jalles' conference call to discuss the results of the second quarter of crop year 2025-'26. This conference is being recorded and has simultaneous interpretation into English. The replay will be available in both languages at the company's website at ir.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 second quarter of crop year 2025-'26 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 the company's management's expectations. Such expectations are subject to change due to macroeconomic conditions, market risks and other factors. Today with us is Mr. Rodrigo Penna de Siqueira, CFO and IRO. I would like to turn the floor over now to Mr. Penna. You may proceed, sir.

Good afternoon, everybody. First of all, thank you very much for joining us for another earnings call. This time, we will be discussing the results of the second quarter of crop year 2025-'26. This has been a challenging crop year climate-wise. In our last call, we talked about a problem in our crushing estimates due to a drought and the most affected states were the states of Goias and Minas Gerais. However, we made some correct decisions when it comes to selling ethanol and hedging, and we are going to address those points over the course of the presentation. And to help me address your questions, we are going to have Henrique, the Sales Director. In the past, we brought Joel Soares, the COO. And this time around, we're going to have the Sales Director with us taking your questions. Now let me give you an overview of the market. Let me just use the pointer here. This is the global sugar landscape at the moment. The Datagro data estimates a surplus of 1.1 billion tons next year, but with a low inventory. And when we look at this picture, we wonder how do we see such a sharp quick drop in a scenario where we still have an inventory in which we have a low level if we compare against 2023 and '24 with prices under pressure. And there is the U.S. shutdown right now, but it is believed that they are operating short, and that has been contributing to the pressure on prices. Now when it comes to our hedge policy, it is quite an advantage that we have in terms of having most of our next crop years hedged, so that we are able to navigate these scenarios with lower prices, lower than the historic levels. And when we look at New York with $0.138, $0.137 per pound as in the last few days and with the exchange rate of BRL 5.3, we have to look around and take a look at the other producing countries. Our cost was BRL 16.6 in Brazil. That's the average cost to send the sugar to the Port of Santos. But now with the -- the cost of Brazil is BRL 18.3. In India, it is BRL 32.1 and Thailand, BRL 19. So when we look at the main producers, the level of BRL 14 is much lower than the production cost. And therefore, we know that this condition cannot go ahead for much longer. With the prices below historic levels, and we looked back and we understood that these historic levels, low levels last for about 18 months. And if things go according to that average, we are well protected with our hedging. The surplus is caused by the situation in India with a growth of 23% going from 26.1 to 32.1. And last year was atypical because we produced less than India usually produces because they had unfavorable weather. But this year, they have good monsoons, and they're going to start the production. They're going to have a very good production. In Thailand, we can see a growth of a little bit more than 1 million tons with a growth of 11.2%. And in Europe, there is a drop by 5.1%. And in Brazil, we can see that the growth has been 1.8% going from 40.2 to 40.9. Now let's take a look at ethanol. When we compare against the equivalent supply that we had in the past with a production of 34 billion liters, this year, we should end it at 33.3 billion liters. And since last year, we had a drop of 3.4 billion in sugarcane ethanol. However, corn ethanol is increasing by 1.7 billion. So to calculate the equivalents against last year, we have to exclude E30 and also we have to exclude the growth in the Otto Cycle fuel market, which is more or less the same as the GDP. And that takes us to a drop of 8.7% for the entire crop year. And that's why we have a good parity in prices at the gas stations. And towards the end of the crop year, it should be even better because consumption of ethanol will have to decrease a little bit. So we have anhydrous ethanol until the end of the crop year so that we can sustain the off-season. Here, we have the projections by SCA for the next months. As the parity at the gas station goes up, the consumption of ethanol goes down so that we can reach the next crop year -- and we estimate that for hydrous ethanol, the gross price in Sao Paulo will reach this peak right here at BRL 3.58, BRL 3.60. Now let me give you more color of something that I touched on in the introduction of our call. This is the scenario, the climate scenario for this year. And here, I'm just talking about the states of Goias and Minas Gerais, okay? When we look at the TRS, total recoverable sugar. In Goias, we had a drop as of September of 4%. And there was also a 2.2% drop in our TRS in the Jalles unit and an increase in TRS by 1.1% at the Otavio Lage unit. Now when we look at total tons of sugarcane per hectare rather. And here, we get the information from basically all mills around Brazil with a very substantial sample. About 60% of the sugarcane crushing in the country is represented here in these numbers. And in the state of Goias, the tons of sugarcane per hectare decreased by 10.2% and in Jalles Machado unit was 17.6% and 6.8% in the Otavio Lage. Now why did we have a sharper drop in the Jalles unit? It would have been 14% if we had only conventional sugarcane. But in organic sugarcane, which accounts for half of our sugarcane field, we had a lot of weed competition because in October and November, we had a lot of rainfall, which is when the weed grows, and we did not have time to use the mechanized practices that we use to manage weed and that had an impact on our yield in the organic sugarcane fields. That's why the drop was more significant at the Jalles Machado unit. Now in the state of Minas Gerais, the TRS dropped by 3.6% as of September, and in Santa Vitoria 2.5%. In terms of sugarcane per hectare in the state of Minas Gerais, we had a drop by 18.2%. And in Santa Vitoria, it was 11.9%. So it decreased less than the average in the state of Minas Gerais. And since we -- when we changed the mix towards sugar from ethanol, that has an impact on TRS. In Santa Vitoria, if we look at the field, the drop was only 0.7%. So this is just an overview of what happened across the three units, considering the weather in the states where we are present. Now let me show you some operating highlights. Our harvested area increased by 9%, but our crushing dropped by 6.8% because of the tons of sugarcane per hectare, which decreased by 14.5%. And here, you can see the tons of sugarcane per hectare per unit with 82.5, 89.6 and 63.6. Now a total TRS per hectare dropped by 15.2% and the average TRS dropped by 1.1%. Now our mix, our expectation early in the year was for the mix to be heavier on sugar. But as we said in our previous call in August, since June, at the Jalles unit, since we are not producing organic sugar, we had already been focusing on anhydrous ethanol instead of sugar. Not organic, though, because there is a premium, so we focused on that. But since June, we were already favoring anhydrous ethanol. And then from August to September, hydrous ethanol improved in comparison to sugar in the state of Goias. So we decided to produce more hydrous ethanol at the Otavio Lage unit. And that's why our mix is -- our share of sugar was a little bit lower in our mix than we expected because we made that decision. And since we have a financial hedge for the sugar, if ethanol gets better, we can migrate from our hedge position to ethanol without any cost to undo that deal that we would have if we had hedged with the trading. In that case, we would have the take-or-pay costs and freight and all that, but that is not our case. And just to give you an example, if we had a sugar hedged at BRL 2.5, if the price dropped to BRL 1.8 and hydrous ethanol would give us an equivalent to 2,000. You can exit your position, you make that adjustment from 1,800 to 2,000 and you have that gain. And that's what the company did. And that has mitigated at least a portion of that lower production scenario. The average age of the sugarcane field is 3.1. Our sugarcane fields are well balanced in terms of age. And with the severe drop that we have, you can see that, that caused that gap. The average price for sugar is 1.5% lower than last year, but it's basically flat. And the average price of ethanol is a lot better year-on-year, 14% higher. And here, you can also see the behavior of sales and prices this year compared to last year. And now sold TRS, we sold 63% of everything that we produced and sugar accounted for 49.4% of our production. And we produced -- we sold rather 522,000 tons in TRS. Our ethanol inventory is low because we had a promising increase in prices. But when we do the math, we had to factor in the loading prices, and we started selling in September at the price level that was a little bit higher. But we are going to have a lot of ethanol to sell in the off-season. But last year, we held it back a little bit more because the context was different. The inventory of sugar is lower because we're able to ship organic sugar in a very high volume. And we said in the last call that we had not shipped part of the sugar produced last year. Now let's take a look at the sugar prices. you can see that the hedges are way above the sugar price, and that led to a very good mark-to-market value. When we put together these two amounts here, FX and sugar, that's all related to sugar, the positive mark-to-market. And indexer, BRL 61 million negative because there is a larger gap between the two curves. If you look at March 2025 to now, you can see that the curve is in a downward trend, but this is a noncash effect. Our average debt is the CDI rate plus 0.6%. And now we're having the opposite effect. We are going to start seeing the curves getting closer according to the most recent inflation data. The cash net income is BRL 35.3 million. And in the release, you can see the calculation. We exclude the noncash effects from this number. Now our adjusted EBIT, 10% against 20%. But in our release, you can see more details. We adjusted the way we calculate our adjusted EBIT because since we have a financial hedge, we end up not seeing the better prices that we sold at because it goes to the financial side. So the -- a hedge instrument that became cash in relation to the commodity hedge is factored in this adjustment. And that's a more fair description of the reality. It's a better snapshot. Otherwise, we wouldn't be able to see the result of hedging on our EBIT. We would only reflect the spot prices. Now adjusted EBITDA it stood at -- the margin stood at 59.1%. You can see that the debt grew by 3% our net income decreased by 48.1%. And here in our net debt, you can see that the growth was actually small considering the interest rates, and we are at a very comfortable leverage level. The term of our debt is at an average of 5 years, covering all of our debt until 2030. And we liquidated a CRA bond that was included in our cash. We had two series, one for 6 years and one for 10 years. The 6 years, one was at 99% of the CDI rate and the 10-year one 13.42%. And we swapped to the CDI minus 0.15% (sic) [ 0.185% ], which is 98% of the CDI rate. So here, we are talking about a raise that is longer and -- that is lower rather than the CDI. And we also had an FC (sic) [ IFC ] in the amount of $60 million. And we are going to have that disbursement in the next quarter. We have to meet some conditions precedent, but we had this deal with FC (sic) [ IFC ]. FC (sic) [ IFC ] was in a summit before the COP, and we were there in person with them last week in Sao Paulo. Now our hedging operations, we changed the way we show this information on the slide in comparison to the last quarter following a suggestion from analysts and investors and Natal upgraded this slide for you. Here, you can see here, you can see the numbers as of November. And here, you can see '25-'26 at BRL 2.4 (sic) [ BRL 2,431 ]. Today, the market is at BRL 1.8 (sic) [ BRL 1,805 ]. So we are 35% higher than the spot price at the stock exchange today. Not the spot price, but for the period that we still have to -- that we still have in this crop year. For '26-'27, we are at BRL 2,475 and the market is at BRL 1,881, 32% above the market and 75% of our available sugar is hedged. Now '27-'28, 36% of the production is hedged and the price is BRL 2,530 and the market is BRL 2,121. And the average historic level is BRL 2,320 per ton. So across the three crop years, our prices are above the historical level. Now the cost of products sold due to the crop failure, we had an increase of 11% in our unit costs, precisely because of the impact, the 16% impact of lower tons per hectare. Otherwise, if it weren't for that, there would have been a decrease in the accounting cost. And in our cash, considering depreciation and recurring cash, the unit cost is negative, 2.1% and in cents per pound, 4.4%. And that's it for the presentation. Now we are ready to take your questions. And if you would like to ask a question directly to Henrique, he's going to be here to address it. Thank you very much. We are ready to take your questions.

[Operator Instructions] The first question comes from Mr. Pedro Fonseca with XP.

The first point that I'd like to ask you about when it comes to yield in the short term and in the long run as well. I wanted to know your perspective about the yield in the last portion of the crop year? And how comfortable are you about meeting the guidance as far as crushing is concerned this year? And also, what can we expect in terms of a recovery in the tons of sugarcane per hectare and other indicators for the next crop year? And Rodrigo, if you can break it down per mill since in the Jalles Machado, we had a competition problem. If you can give us a breakdown, that would be great. And I have a question about the robust results from hedging operations. Should we assume that we are not going to see a significant price swing? I understand that considering your changes to the mix, we should see more results from that movement with the hedging instruments. I want to know if my assumptions are correct. And what would be the potential results of the liquidations of hedge instruments towards the end of the crop year. And of course, we need to consider the FX rate and the price of sugar. But if you can give us ballpark numbers, theoretical numbers, that would be great.

Thank you, Pedro, and good afternoon. Thank you for participating. Pedro, starting about yield and also our ability to meet the guidance. We are now ending the crop year until the end of the week or maybe Monday, we are going to have the full numbers about the entire crop year to disclose to the market and also the numbers about the productions and yields and all that. And until now, you saw that we are reaching 7 or 8 in yields, and we are not going to be able to meet the reviewed guidance. Unfortunately, we are going to have a frustration in comparison with what we had expected in August when we made a commitment to our guidance. We expect it to have a better last third of the crop year than it actually was. And looking at the next cycle, I think it's too early to tell you anything because rains just started here in the region. They started in October. In the state of Minas Gerais, it starts a little bit earlier than that in September. And we're getting good rainfall in Minas, and it was the state that suffered the most. It's been raining since September. And in the state of Goias, it was delayed by 15 days. In October, we had some showers in September, very little, about 10 to 15 millimeters. And in October, we had a delay of 15 days. But we expect to see a recovery. We can't tell you exactly by how much. We have to wait and see what happens a little bit later into the season. Last year, we were very excited. And then towards the end of the cycle, we had a drought in February and March with 30 to 45 days without any drop of rain, and it had a major impact more than we expected. And our agricultural team imagined that we would have better yields. Now when it comes to the migration from sugar to ethanol, we are going to see an adjustment related to the sugar that we decided to not produce because ethanol was giving us more profit. And that Pedro is going to cause an impact of about BRL 30 million. That's the order of magnitude. That's a ballpark number. This is not an accurate number by all means. And also, we should remember that we have irrigated areas that allow us to mitigate the impacts from the weather. And in Goias, we have more irrigation. And of course, the weather causes impact in the state of Goias as well, but not as much as the other players have to endure. And in some units, the problem was with the organic sugarcane field, as I mentioned during the presentation. Is that clear, Pedro?

Yes. If you allow me to follow up on one point, the BRL 30 million that you mentioned that we are going to have a potential benefit from the hedging operations, would that money come in the next crop year? Is that correct?

I apologize, Pedro. Can you repeat the end of the question?

The BRL 30 million estimate that you mentioned, would it come in the next crop year?

No, no, I'm talking about the current crop year. It would be from BRL 20 million to BRL 30 million. And it's not really hedge. It is, but it's the sugar that we have planned to produce, but we didn't because we produced ethanol. And there was an adjustment because the sugar price went down, and we decided to migrate to ethanol. It was a positive impact. It was a gain.

The next question comes from Mr. Gabriel Barra with Citi.

I have actually two questions. The crop year was tougher this year. And I think that you were the ones that started cutting down CapEx for this crop year earlier than other players. Other players announced that this week. As you said, it's too early to have a clarity about the yield from now on. But I'd like to know more about CapEx for the next crop year, in terms of prices. I'm not going to say you are comfortable, but you are a little more comfortable than the other players because of your hedge position. So I'd like to know more about your CapEx policy. What can we expect? Maybe it's too early, but I'd like to know your two cents about that. And since Henrique is here together with you, Rodrigo, I'd like to know more about your sales strategy. You talked about ethanol. You said that you anticipated sales, you advanced it. And in one of the slides, you showed that there was an improvement in prices, because there is a shorter inventory. So I'd like to know how that fits into your strategy? What's the risk that you see now with sales since you expect to see higher prices. Why shouldn't you wait a little bit longer to sell ethanol? And also, many players are saying that they're going to increase the production of ethanol in Brazil. So maybe you should adjust the volume of sugar that you put in the market. So for the next crop year, if you can give us more details on those points, that will be very helpful.

Okay. I'm going to answer your questions about cost and CapEx, and Henrique is going to talk about the sales strategy, okay? So starting with your first point, when it comes to CapEx, with the challenging price scenario that we have right now, although we are hedged for the next 1.5 years, when we look at the crop year 2027-'28, we are -- 36% of our production is hedged. But the beginning of the crop year is covered by 60%. So we are very well protected for the next 1.5 years. However, ethanol will be more challenging next year because we're going to see an increase in the production of corn, ethanol and the sector should crush more. It's still too early. But since there was a crop failure in this crop year, everybody is estimating a recovery because it's raining more in the main regions in September and October. So we expect to see a crop year with a volume of [ 725 million ]. We're going to have more supply than we had this year. So we decreased the CapEx. We're going to reduce as much as possible to the extent that it does not cause harm or losses. We have to be smart in that reduction as well, right? It shouldn't affect the return that the company has. Many people in the sector end up cutting things like crop management and sugarcane renewal, but that is going to take a toll on your production down the road. So that's the kind of thing that we don't do at our company. But the improvements that we can postpone, we're going to do it this year and next year, especially because of the interest rate is still about 15%. Now when it comes to costs, next year, if there's a good recovery in the tons of sugarcane per hectare, the unit cost should go down. One of the impacts that we had this year -- and this year, the cost should be as good as or lower than last year, but we had a crop failure, and that came in the way of our costs. The cash cost is actually lower, but the accounting cost of the product is a little bit higher this year. So if we consider the main items, we are going to see an increase adjusted by inflation in the workforce in our personnel costs. The workforce is very good here in Goias and Minas Gerais. So we believe that we will have to adjust the cost according to the inflation, if we can't capture efficiencies, but that's what we are always striving for. We want to do more with less. And if the yield goes up, the cost should go down. Diesel is cheaper and it's a very important input. And then we have personnel, labor cost, fertilizers and crop protection. Fertilizers are a bit more expensive in dollars, but not in Brazilian reals and crop protection and industrial inputs as well. So those are the main cost components. Now yields have a major impact on the unit cost. And now over to Henrique, but thank you, Gabriel, for joining us in another call. And now Henrique, over to you. Henrique is going to talk about the sales strategy for the next crop year.

Good afternoon. Well, this is my first call. So thank you very much for questions, Gabriel, and we are here to take all your questions. And if you have more questions, please make sure to ask them. Gabriel, I think that you touched on two points. You asked about the sales strategy and also the sugar ethanol mix for next year. Starting with the sales strategy. Well, Gabriel, if we look at the prices for April and May, starting with ethanol, okay? In April and May, the ethanol prices were very good. And with very high interest rates, we would have problems storing ethanol. So in April and May, we sold a very good volume. And then in June, the price dropped. And at that moment, we decided to cut it down. Storing ethanol was a better idea, but it wasn't a situation in which, it was so easy as last year. Last year, it was so clear that the price would have to go down for us to keep our inventory. We kept 62% of our crop year, and we carried that into the off-season. But this year, we had the gasoline risk. And the gap between gasoline and ethanol decreased, but there is room for more. The interest rates are too high, so it costs more to store ethanol and carry it over to the off-season. And also, we have the production of corn ethanol, which lasts 12 months. It's different from sugarcane. So we carried 50% of the production to the off-season. So although we decreased the inventory for the off-season, we decided to have a reasonable volume. In 4 months, we are going to sell twice as much as we sold month after month during the crop year because it's 4 months versus 8 months. So we are going to carry in those 4 months, the volume of 8 months. We have good inventory. Today, the price -- according to [indiscernible] in Goias in Sao Paulo, the prices have reacted already. In November, we are selling more. And we believe that it was a very positive policy that we adopted because we did not carry that much inventory, but there were several factors that we needed to take into account. We don't have a crystal ball, but we decided to carry a high percentage of inventory to the off-season lower than last year, but it was a high inventory. Now about sugar, well, we have been selling everything, and it was a very good decision because our hedge is financial. So we can revert the mix and make it more ethanol heavy and bring the result -- the hedge result to our pockets to cash it. So we are selling more sugar now in April and May, we were selling at BRL 130, BRL 135. And today, according to [indiscernible], the prices are at about BRL 100. So it was positive. And now about next year, the mix between sugar and ethanol. If we look at the price incentive anhydrous ethanol would be the best product, hydrous ranking second and sugar third. If we try to guess what's going to happen in the future, since the sugar market has already dropped a lot in New York, and we actually believe there is a little bit of overshooting here. It's lower than it should be. It's below BRL 14. And as Rodrigo said, that this encourages the world from producing ethanol. And we don't think BRL 14 is going to be sustained for the rest of the year. It should get closer to BRL 16. And what can happen is that everybody is going to start producing more ethanol. But as the price of ethanol goes down over the course of the crop year because we see -- we envision a big supply of ethanol, that is going to make sugar more competitive. So that fight between ethanol and sugar in our mix is not going to be set in stone. In the beginning, you should have more incentive to produce ethanol, but it can -- it may as well revert along the crop period. It's going to be very dynamic. That production should oscillate a little bit. Did I address your question? Please feel free to follow up.

No, you did address my question.