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 2026, '27 -- first quarter '27. This call is being recorded and has simultaneous translation into English. Both replay will be available in the company's website at ri.jalles.com. [Operator Instructions] As we have limited time in this call, any questions that are not addressed during the call will be answered later by the company's team. The earnings release and the presentation on the first quarter of crop year '26, '27 can be accessed on the company's IR 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, forecasts, operating and financial targets related to its growth potential are 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 Penna de Siqueira, CFO and IRO; and Henrique Penna de Siqueira, Commercial VP. I would like to turn the floor over to Mr. Rodrigo Penna. You may proceed, sir.

Thank you, Doris. Good afternoon, good morning, everyone. Thank you all very much for joining us. One more earnings release call first quarter '27. We've brought to you a little bit about the market, such a volatile market, so many things happening at the same time. So we've brought Henrique, our Commercial VP, to be part of the Q&A as well. We're going to talk a little bit about the market perspective. We are going to share operational highlights, commercial highlights, financial highlights and a little bit about cost of production. Let's start speaking about the sugar market. The world sugar balance of supply and demand for the year, we have a surplus according to the world sugar stock-to-use ratio, that's the position from August 26, and for next year, we expect 1.6 million in deficit. You can see here the curve at lower levels of the historical series since 2014, '15. For the past 2 weeks, there had been a number of reviews of some agents reducing further this deficit. Some are getting to 3 million to 4 million tons of deficit for next year. According to that aggregate data, there is a reduction of production in India of 1.3 million tons, Thailand, almost 2 million tons, EU with a substantial decrease of 16.6 going from 16.6 million to 14.1 million, a major risk of production, especially from deep route. China increased 200,000 tons, not very much and Center-South with an increase in tons, 0.7% variation. Because of El Nino affecting all the countries in Asia, which may also affect Center South region with rain, abundant rainfall expected in the state of Sao Paulo and Parana. So we expect a major effect if it happens. So the situation has changed enormously in the past 2 weeks. And here, there is a comparison of the curve of the future of sugar in Brazilian Reals. The dotted curve, it's from 1 month ago, so the light green curve. The other curve is a 1-week old curve. And comparing both curves, there had been over 15% increase in prices, then 13.5%, 12% in October 27 and March '28 on, there has been an increase as it were at a better level. At the same time, there had been a reverse in speculating funds, which are constantly used by the market to measure this position of purchasing or selling supplier demand. So in the week of 4th of August as a reference date, they were trading at 91,000 contracts sold. One week later, 25,000 purchased contracts sold -- bought contracts or 116,000 contracts, the second highest weekly change in history since when the data started being collected. A quick reversion, very significant one that we observed in recent weeks. It shows an improved landscape. The trend couldn't be really explained because the market was indicating deficit for the upcoming year, but with prices which were loose and very low. Well, now we can understand because the foundations are really impacting the market. Now speaking about ethanol, last year, there was a demand of 33.6 million liters. This year, we are growing 1.85 million more of corn ethanol. These are data from FGA from August 26. Sugarcane, BRL 3.7 billion increase. If we add up both in terms of supply, there would be 4.6 million liters, which will be mitigated by E30 for 4 months and 8 months of E32, which add up 1 billion liters growth of Otto cycle, 680 million liters. And inventory levels. The stocks were very low last year, much lower than the history. Therefore, we expect it to have a difference in inventories through the crop season. But compared over the same basis last year, we were talking about 3.4 million liters more that the market has to sell during this year. And this is why ethanol was subject to so much pressure at the beginning of the crop year. We will have to have a parity below that of last year. It was 68% last year. This year, it will probably be, as you're going to see at the range of 62% on average. But there are many talking about 64% on average. Relying on the curve presented by SCA, which is updated weekly, this one was from last week. It's estimated ethanol at gross price going from BRL 2.58 in August up to BRL 2.55 in August and starting to pick up from now on. What has happened in recent days? Sao Paulo is at BRL 2.75, so it has pulled up the prices in the market of Sao Paulo, anticipating the movement because of increase in sugar prices. Many plants are changing the mix because of the reactions of prices in New York. Now parity in August, which was 57% is expected to grow up gradually. And now we anticipate and looking from hindsight, it seems that consumers now are really buying more and more ethanol. We know there is some level or some period of delay from the beginning of price drop at a parity level that encourages consumption. But it takes a while for consumers to really embark on buying more and more ethanol. But now it is there, and we can have an improvement in prices. Another important thing to mention before I go into the next slide, and it was shared in the news. There is a project PLP 114, which was being discussed in the Congress in Brazil. Last week, it was approved in the Congress and Senate. Still waiting for the approval or veto of President Lula da Silva, but it's expected to pass. This PLP 114 appeal will give the same incentive that was given to gasoline to ethanol. And it was BRL 0.44 of subsidies to gasoline for ethanol, so for gasoline type A, right? But gasoline C, which is used for consumption, had a 32% of ethanol, of gasoline. So that would be 68% of the amount, which means BRL 0.30. This is what passed, and it's going to be retrospectively to May. And as long as there is subsidies to gasoline, there is going to be provided also to ethanol. It's good news. It would not be acceptable, of course, to provide incentives to fossil fuel and simply have renewable fuel out of that receiving of subsidies. So that's going to be very important for the market of ethanol and biofuel. But even so, our prices are lagging behind. The price of gasoline A, even with the BRL 0.44 and Petrobras increased it by BRL 0.48, but there is still a huge gap that should be passed through to prices. Petrobras is still controlling that. And of course, it impacts negatively for us at the ethanol market. This bill of law, PLP 114, as I told you, it is going to be retrospectively amounted for since May. And the government has also agreed the credits of tax up to BRL 750 million that the crushing plants have can be compensated for a while, still waiting for regulation, but that would be one more initiative that would be helpful to kind of offset taxes. Operational highlights. Harvest area was 2.5% higher than last year. Crushing 10% higher as well because of productivity, which is 7.4% higher than the same period last year. Jalles closed with 99 tons per hectare, Otavio Lage 90 per hectare and Santa Vitoria 79 tons per hectare, that was yield. TRS per hectare. Here, we can see 88% increase, median TRS 1.3, and a production mix, which was ethanol-oriented because sugar was not performing well. We had a more ethanol-oriented mix, changed our hedge position when sugar was at BRL 1,600, BRL 1,700, going more into a ethanol-oriented mix. And it was the right time, so to speak, of adjusting this position for our new mix that we are going to show you. From the first quarter on, we have 100% of sugar for the year. It's subject to hedge, all fully hedged for the current year crop '26, '27. Average age of sugarcane, very similar to what we have, 2.6 years, Jalles and Santa Vitoria lower and Otavio Lage is somewhat higher than last year. Here, commercial highlights without considering the effects of hedge, significant decrease, 26% in the average price of sugar. Ethanol had growth -- a decrease rather of 12% in the price of all kinds of ethanol. That's the weighted average of all types, including hydros and anhydrous. It started at BRL 3.12 and it went down in May and June. In July, it went either lower, but in August, it has recovered. It's back to BRL 2.75 in Sao Paulo. We have sold less than the same quarter last year, only 35% or rather 51% of our TRS as opposed to 68% last year. Therefore, our ethanol inventories went up in our strategy of not selling ethanol when the prices are as low as we had. Of course, we still sell a little bit, but we really decreased the sales strategy. Sugar inventory is somewhat below the previous year. The first quarter was very much ethanol oriented, as we told you. Now financial highlights. EBIT, EBITDA, they are adjusted here. In addition to the adjusted that we've always done with equities and biological assets, we've considered the settled hedge of foreign exchange and sugar that we do, sugar in dollar and foreign exchange, of course, transforming that into Brazilian Reals. But that applies only to sugar. In the quarter, EBIT margin with a settlement of hedge was 19.6%, BRL 67 million as opposed to BRL 27 million previous year. Adjusted EBITDA in turn EBITDA, even though there is a lower amount of revenue, it was aligned with a much higher margin of volume than previous year, BRL 79.1 million. Net income had a negative impact of BRL 74 million as opposed to BRL 14 million negative. But if we exclude noncash effect, MTM, biological assets, we end up getting to better cash earnings despite the challenging price landscape, maintaining inventories, we still had better results than last year, and this is thanks to the hedge because theoretically, it should be worse, even though we had better yields, but the price conditions were much worse. So hedging was essential in the results for the quarter. Why had our MTM being so negative in the quarter and affected our results and net profit. Hedge and derivatives was negative in BRL 74 million as opposed to BRL 231 million positive in the same period last year. Let me make a highlight here, especially the hedge of indexers. 80% of our debts were issued with IPCA+ and the debts were swapped to CDI. With the opening of curves that you can see here on the left, we can see the curves of NTNB from March, fourth quarter '26 to the first quarter. Curves got separated here in a 1-, 2-year period, 100 bps. This is exactly the impact that has accounted for this BRL 50 million MTM, but this is the debt we have with 10-year maturity, average maturity price of 5 years. This is going to be paid throughout time, but we can also expect the curves to get closer. But that's a historical high for this variation of yield curves really because since the end of the government of President Dilma Rousseff. Well, in terms of hedge, what is ahead of us? We have a volume fixed overall guidance of 85%. But over the available volume for hedge, we have 100% fixation on our crop '26, '27 at BRL 2,500, which is 27% above the market from August 11. For 2027, same range, 2.5 the market is at 1.1. We are 18% ahead. And for 2829 with the recovery of the market, we are somewhat below, but '28, '29, we only have 24,000 tons fixed for that period. It has just been the beginning of setting the hedges based on our policy. So the volume is still open for it. And in '27, '28, 179,000 and 157,000 tons of '26, '27 of sugarcane already fixed by hedge. As there had been inventory retention, there was an increase here, 2.3%. So adjusted EBITDA was below. Here, we do not have settled hedge because the metrics that were defined to negotiate our debt does not consider the settled hedge. So this is just regular hedge calculation. It's increased because the EBITDA went down. We had lower revenues, but have inventory ahead and the debt went up because we have higher inventory levels. BRL 1.6 billion is our cash covering all our maturities for '29 and '30 5-year period. In July, we reported an operation of long term with IFC. It's an operation where we had BRL 300 million, $60 million long-term operation at a cost of SOFR plus which was somewhat below CDI plus 0.6 per year. At a price level, which is very coherent with the levels that we captured in the market, all in, right? Production cost. Well, cash vision, we have a quarter which was somewhat distorted, I have to say, because the cash understanding is all our recurring our recurring CapEx. And as we had low revenues, we had very little depreciation. Therefore, it's a quarter that if we don't sell as previous years, it requires some adjustments to avoid distortion. And this is why I always like to show cost of production in millions and in tons of TRS to show the difference between what we are producing and accounting for. We had 0.4% lower cost and 5.1% lower Real over TRS. The cash understanding is getting more and more coherent as there are more periods coming to account for. It is fair at the end of the year. But as a market practice, we always share with you the interim results. But it's important to really explain why because in the first quarter, this number may get not as precise as expected. Well, we had a quarter not with great revenue, but our crushing levels at very good numbers in Goias, we didn't have to stop any of the production because of rainfall. Santa Vitoria in June experienced rainfall not expected for the period, and we had to skip some production days. But apart from that, everything is running as expected to close the season in November. Even in Santa Vitoria, we don't expect to have any excessive sugarcane in the fields, harvest will be completed. Now let's go into the Q&A session. Henrique is here with us, and he can answer any commercial questions you might have.

Let's start our Q&A session now to ask the question. [Operator Instructions] The first question comes by Victor Modanese with UBS.

First, I would like to have an update on your strategy of sales of ethanol and also your mix, considering the current prices of both commodities, we can see a sugar-oriented mix going up in some regions. So that's my question. In your case, specifically, considering the tax benefit, your location, your distance from the port, have you thought about going into more sugar-oriented mix? And as Henrique is here, with improvement of ethanol price in last week, as you mentioned yourself, is it worth thinking about selling more from now on because you've prepared good inventory levels. My second question is an update about organic sugar. Have you been talking to your potential clients? I know concentrations -- sales are not concentrated on the second half of the year. But I would like to know what you've been talking with your potential partners about the purchase of organic sugar. You've talked about a 5% possible drop in price of organic sugar in your last call. But now knowing about the prices in Brazil and also regional competitors that work and also have organic sugar production, are you expected to maintain the same levels?

Good afternoon. Great to be here with you. Now and then I show up to talk a little bit with you. Thank you, Victor, for the question. I'm trying to address all the issues, and please let me know if I forgot anything. About inventory policies. This was the idea, as Rodrigo said. We saw the prices of ethanol the prices went down compared to previous year. In May, the price was really low. And from then on, we thought that we could really use our storage position in Otávio Lage, Jalles Machado and Santa Vitoria. So we started building up our inventory, selling lower volumes than last year, having that in mind. Of course, we monitored it closely, but we believe that there was a high potential to increase prices. Now thanks to price increases, we are thinking about future opportunities. We can still carry on our inventory without selling it immediately. We'll hold it for a while to sell it at the best time where we can see good carryover for the period that we have off season, but always monitoring ethanol prices because if it reacts strongly in upcoming days. We can also calculate what we expect. We consider carryover. Normally, there is 14% interest rate. If prices go up to BRL 2.80, BRL 2.85, maybe it makes sense to sell a part of our inventory. But so far, we expect to wait until last season to sell the volume of ethanol we have in our inventories. You've also asked about mix. In the beginning of the month, we had made a change. As you know, our unit Santa Vitoria is in Minas Gerais, very close to export points and the units in Goias. In Goias, we have maintained the same focus because the price is highly competitive with the subsidies for hydrous and anhydrous ethanol prices. But in Santa Vitoria, now it makes more sense to sell sugar and to produce more sugar there. So we've switched our production to sugar-oriented mix in the unit Santa Vittoria. It's so great that we had a large volume of sugarcane available. So that's going to be quite good production. We've had good price ranges and part of the volume has already been hedged. Now talking about organic sugar, our position is quite robust. We have already traded nearly 90% of the volume of organic sugar. We are contracting most of this volume. There was an impact in price. As we thought that the U.S. could maintain the high tariffs, our customers in the U.S., they started asking for discounting part of the volume. There was a decrease in price of about 8% over last year. But in terms of volume, there are 2 points to be made. First of all, there was a minor decrease, including the volumes for the U.S. However, it is related with the breakbulk movement that we had in the first quarter last year. Breakbulk was a ship of bagged sugar in the lower portions of the ship. It was a one-off episode, and it was in April, May last year. This year, we haven't had that any of this breakbulk initiatives. So the total organic sugar sold up to March next year will be at about 65,000 to 70,000 tons. Have I covered all your questions?

Yes, absolutely.

Let's move on to the next question, Guilherme Guttilla with BTG.

I have 2 questions. First, concerning the unit cost. I think during your presentation, you showed the difference of unit cost of TRS that you produce and that you sell and why there might be distortions during the quarter. But thinking about the crop year as a whole, based on what you've seen so far and what you anticipate, what do you think it's possible to consider in terms of dilution of unit costs for this crop year? My second question concerning productivity, but now focusing on Santa Vitoria. There has been a decrease on the average age of your sugarcane fields in Santa Vitoria, meaning that you've been really renovating it. How much is still left to get to the ideal, so to call sugarcane field for this unit? And when you get to that level, what would be the amount of sugarcane per hectare that you expect this unit to be able to yield?

Good afternoon, Guilherme. Thank you for being here with us and for your participation. It's a good question. And I'll just pick back on your question to share with you some interesting data concerning Santa Vitoria and the yield of irrigated crops. But first talking about cost. In the last call, I told you that we were expecting a recovery of productivity. And if we combine it with what's going to be spent, we expect 5% cost reduction, which is what we showed in the first quarter. What we are producing already has shown 5.1% cost reduction per TRS ton. The average age of our sugarcane field in Santa Vitoria in the quarter, it was low because we had the first sugarcane planted last year. It was not the best, what was harvested this quarter, but it has low average age because we are renewing the sugarcane fields and expanding them. The one we have in Santa Vitoria, what we estimate is to bring productivity to 80 tons per hectare, which is our goal. We expected to do it this year. And we told you, we gave you a guidance in Jalles Day, 3 years saying that this year, we wanted to reach 79 tons per hectare of yield. We didn't get that much because of the drought last year and also because of management adjustments, which were somewhat slower than expected. I think Joel talked about that in our last call. Joel, our VP of Operations was asked to give you some more information about that.

Even those who were with us in Santa Vitoria last year out in the field, we showed you where we had the implementation of central pivot for irrigation. We've already have 60% of these areas of still irrigation. And next quarter, I'm going to show you what the 100% looked like. But the productivity that had been estimated at 150 tons per hectares went up to 170. And in terms of viability, to have this irrigation project, we considered 130 for the feasibility study, the company estimated 150 for this year, seeing that the sugarcane was great, but we are getting even more surprised because the same area -- when we used to have unirrigated sugarcane, of course, where the previous owners of the Unit Santa Vitoria used to operate under their management, but it reached 80 or 85 tons of sugarcane per hectare, the same sugarcane in the same area in the previous cycle. Can you see the variation? It went from 80, 85 up to over 170. The question that we had, whether full irrigation would have an impact in Unit Santa Vitoria as it has here in Goias, it is be much better even than we thought, something good because we have water abundance, and this is going to help us increase yields -- but there are a number of other things that we've been doing in terms of management, salvage irrigation, organic fertilizers and also replacement of areas, right? Exchanging areas that have lower clay content, we are returning some areas, getting others. All of that has been done by the company to adjust that because we -- there is a full supply of areas in the region to be explored, right? So center pivot irrigation has proved to be essential.

We have a question from Gabriel Barra with Citi. Gabriel, I'm sorry, I cannot hear you. Well, I'll give you the question later, Gabriel. Let me now invite Tomazetto with Itau BBA.

Rodrigo, when we looked crushing in the quarter with a 10% acceleration, very much aligned with the guidance you provided. For the 10% you added in the explanatory note, I didn't think that would be 10% for the quarter. So please help me understand how good that 10% can actually be. Would there be any upside in that specific guidance? Just comparing really the beginning of the year and the expectations that you have to the year-end. As to the settlement of hedge in the quarter, it seems that there was some mismatch between the hedge you had in the past as opposed to the production index that was more ethanol oriented. Now we are going -- you're back in 100% of hedge of the available volume. Tell us more about the timing and how you undo operations. And maybe it could have been done more by the end of the year if the market just became more sugar oriented. For example, we've just heard about that adjustment in Santa Vitoria. Just understanding volumes and timing, how do you manage that in terms of hedge and the operations that you've had with your settled hedge?

Bruno, can you hear me all right?

Yes.

Well, crushing in the first quarter. Let me tell you how it was as opposed to our guidance. We have confirmed our guidance in the release, but it has a bias of an upward trend. The first quarter was surprisingly good. But we still have, of course, the continuation of the crop year. We've been monitoring it closely, and we might revisit if we are going to maintain the same levels of crushing or not. So far, I can tell you that the first quarter was somewhat better than we expected, not much, but any percentage in sugarcane volume impacts our cash, of course. Now hedge settlement. Very good question. We had an adjustment because we have had a hedge for a landscape which was more sugar-oriented than it was in May and June. And why did we decide to make an adjustment going into a more ethanol-oriented mix? Because the price was BRL 1,600, BRL 1,700 per ton. It was a good moment to have the adjustment. So we made the adjustment of to the point that we realized it would go into ethanol-oriented mix, but not the end of the crop year because we can produce sugar. We are not working or supporting our hedge for speculation, but rather for price protection. There is a logic policy to be followed. We've adjusted between May and June, but without undoing anything to the end of the crop year, right, because of sugar-oriented mix. There was an 80% and now it was 100%. It became 100% of available volume. And it turns out to be good, right? Because once we made the adjustments, it was at very low levels, and then we started working on ethanol, which was better. But now if sugar pays better, we already have a sugar-oriented mix to the future. And if it is so, we can always sell it at better levels than we had bought back. But for the volume that we expect to have of sugar yield, we have 100% of the operation fully hedged.

Another question from Citi, but not Gabriel Barra. It is Pedro Gama with Citi who is going to ask a question.