Raízen S.A. (RAIZ4) Q1 FY2026 Earnings Call Transcript & Summary

Good morning, everyone, and thank you for waiting. Welcome to Raízen's First Quarter 2025-'26 Crop Year Earnings Presentation. This presentation is being recorded and will be available at the company's IR website at ir.raizen.com.br and also at Raízen's official YouTube channel. [Operator Instructions] Before proceeding, we would like to clarify that any forward-looking statements are made based on Raízen's management in view of information currently available to the company. These statements may involve risks and uncertainties as they relate to future events and therefore, depend on circumstances that may or may not occur. Investors, analysts and journalists should also be aware that events related to the macroeconomic scenario, the industry and other factors could also cause results to differ materially from those expressed in such forward-looking statements. Joining us today are the following company executives Nelson Gomes, CEO; Rafael Bergman, CFO; and Phillipe Casale, Head of IR. I would now like to turn the floor over to Mr. Casale for his presentation. You may proceed, sir.

Good morning, everyone, and thank you for joining us to Raízen's conference call to present the results for the first quarter of this new crop year '25-'26. I would like to start by saying that we made some important progress in executing our strategy, but also we had some short-term challenges that affected the operating results of this period, especially in the Ethanol, Sugar and Bioenergy segment and in Fuel Distribution in Argentina. As shown in the chart, these 2 segments were the main drivers of the decrease in consolidated adjusted EBITDA year-on-year. On the structural front, this first quarter, I would like to highlight 2 initiatives that were very much aligned with our operating plan disclosed in May. Firstly, we had cost reduction, there was a 20% reduction in G&A expenses across the company, excluding a provision in ESB related to the structure optimization. This represents BRL 147 million in efficiency gains when compared to the same period last year. The second point is our capital allocation discipline. Investments were down by 23% in the quarter when compared to the same period last year. And this is also in line with our annual plan, our investment plan for '25 and '26. Now let's move to the highlights per segment, starting with Ethanol, Sugar and Bioenergy. The beginning of the season was quite challenging for the entire industry, and that was due to 3 main factors. We started with dry weather and fires in the second half of the previous crop. And during the off-season, we experienced less rainfall when compared to our historical record, and this also limited cane development. And also in the quarter, this quarter, we had above-average rainfall, delaying harvesting. And by the same token, this increased costs due to lower capacity use. It's also important to bear in mind that in the same period of last year, which is the comparison base, we had a favorable weather for crushing and that also included volumes from the UMB mill, which was idle this year. On the positive side, we were able to maximize sugar production and sales with prices that are in line with hedge contracts. Nearly all the current crop is hedged at around BRL 1.13 per pound, securing solid margins for this crop year. In ethanol, production and sales were lower, but prices were about 10% higher year-over-year, supported by stronger domestic demand. In E2G, production was up 41% with growth both at the Bonfim unit, but also we have the start-up of Barra and Univalem, both contributing to this better volume. Both plants are operating as planned. We were able to apply all the lessons learned from previous phases, mainly with the Bonfim plant. And now our focus remains on operational stability, process consistency and also safety of the safety of the E2G operation. As for bioenergy, lower crushing also had an impact because we had lower biomass availability. And with that, prices were slightly higher, reflecting our pricing strategy for uncontracted energy. ESB EBITDA, therefore, reflects higher sugar volumes, better rise in prices across products, both sugar, ethanol and also bioenergy, in addition to structural gains we had in terms of OpEx efficiency. These effects were offset by higher costs from lower crushing and by a strong comparison base that last year benefited from tax credits and energy contract revaluation. And this is quite apparent when we look at the adjusted EBITDA year-on-year, as you can see in the chart. Now we'll move on to Fuel Distribution in Brazil. Our performance was quite solid this quarter. We had higher sales volumes, especially in diesel and lubricants. We were also able to capture structural efficiency gains in Fuel Distribution in Brazil, adding BRL 10 per cubic meter of benefits when you compare to the same period of last year. And so this is a direct benefit to our operating margin this quarter. We also posted strong supply management with an assertive trading strategy and commercial execution, which ensured better margins when compared to the same margins last year. This combination of factors allowed us to offset inventory losses in diesel and gasoline once we look at prices behavior in the quarter. Last year, the same line showed a gain. The sector still faces high formality, and we continue to advocate for a stronger action against unfair competition, which is key for industry growth for society and government revenue. And through Instituto Combustível Legal, we continue to support all the initiatives to fight this illegal market activity. Now let's move on to Fuel Distribution Argentina. We maintained consistent operations. We expanded our network and contracted customers, while at the same time, we focus on higher-margin segments. However, this quarter, we had 2 temporary factors that affected results. The first was that we had longer-than-planned maintenance at the Buenos Aires refinery. And the second point is just like in Brazil, we also had inventory losses in addition to currency volatility. These 2 or 3 factors, including foreign exchange variation caused us to have short-term price pass-through. And without these effects, our adjusted EBITDA margin year-on-year would be similar to that of last year. And finally, we are advancing investments to improve the refinery's operating and energy efficiency with the completion of the project expected later this crop year. Now I will talk about Raízen's consolidated financial results. Before reviewing the full cash flow statement, let me highlight operating cash flow. As shown in our results, Raízen remains focused on strengthening our debt profile through liability management, seeking more efficient funding with longer maturities, while at the same time, we maintain a very robust liquidity position. In line with this, this quarter, we refinanced BRL 8.9 billion in supplier financing into long-term debt. This process had been gradually occurring but this quarter, we decided to accelerate the process. As shown on the chart, we can highlight this move. If we were to exclude the effect of the selective working capital items, and here, I'm mainly referring to the reduction of supplier financing and also nonrenewal of some customer advance lines, we reduced by BRL 2 billion, what would have been cash consumption this quarter when compared to the same period of last year. This reflects more efficient management of recurring working capital at Raízen. And it is wise to remember that this quarter has a seasonality, which is more demanding. So now let's talk about our free cash flow. When we look at lower cash consumption in the investment line, this reflects a drop in CapEx level, contributing to the optimization of our capital structure. If we recall the investment plan, we are already pointing out lower investments this year when compared to the historical investments by the company. Now financing cash flow reflects higher net funding in the period. Now moving to our last slide of the presentation. I would like to highlight 2 of the main factors that affected net debt to adjusted EBITDA ratio for the last 12 months this quarter. The first factor is seasonal working capital use plus the management actions already mentioned. And the second point is our lower adjusted EBITDA compared to a base that included one-off gains that were recognized in the metric of last year, but they were not present in the last 12 months. I would like to emphasize that we remain committed to strengthening our capital structure with a very clear objective of creating shareholder value while reducing leverage. Now I'll call Nelson Gomes, our CEO, for his initial remarks before we move on to the Q&A session. Thank you.

Good morning, everyone. Thank you very much for joining us in this first quarter of the crop year 2025-'26. As we commented in our last call, with this crop year, we initiate a new cycle at Raízen under our management. This cycle will focus on simplification, efficiency. We will focus in our core business, and we will also focus on strengthening our capital structure. I will give you a few more details in my initial remarks. Starting with simplification, I do believe that we made important advances. First, in the way we communicate, both internally and externally through our financial earnings report. And also, we've been trying to simplify our portfolio. We made advances in our divestment strategy. We sold 2 sugar and ethanol producing units, 2 mills, 1 in Leme and UMB. And more recently, we hibernated Santa Elisa and now we are operating in terms of ESB, 27 mills. We also sold distributed cogeneration plants and a good part of our projects. And with that, we concluded our JV with Gera Group, which had the purpose of evolving -- of working on DG projects. And so with that, this objective was fulfilled. Speaking about efficiency, we changed our organizational structure. And now we are focusing on 3 core businesses: ESB, Ethanol, Sugar and Bioenergy, Fuel Distribution in Brazil and also our Fuel business in Argentina. We also optimized our entire corporate and operating structure, which led to a SG&A reduction of approximately 20% when compared to the same quarter of the previous year. Now speaking about our focus in the core business, I have some ESB examples. We review the scope of our trading and reselling operation, reviewing all the complexities of the day-to-day operation. Our sugar mix has improved. We have production stability in E2G plants, and we have a very robust plan to increase agricultural productivity in the coming quarters and years. Speaking about fuels in Brazil, in this past quarter, we increased volume with improved margins, both in fuels, but also in lubricants and growth is continuing in a very profitable way. Still referring to fuels in Brazil we manage our supplies better and inventory levels are better. Now our inventories are slightly lower without -- with no detriment to our supply contracts. Speaking about Argentina, volumes are growing. We are continuing our investments to upgrade the refinery, and this also involves the energy efficiency of the plant. Speaking now about capital structure, we replaced some short-term working capital facilities by more competitive long-term debt. We extended the debt maturity, as Casale mentioned during his presentation. And this move explains a great part of the increase in our debt position this quarter. We preserved our cash, meaning that our position is -- our liquidity position is quite robust at the end of the quarter. And since the beginning of our management, we also had BRL 3.6 billion in divestments, of which BRL 2.6 will become cash within this crop year. And finally, last but not least, talking about our investments, we posted a 23% reduction year-on-year in keeping with the reduction CapEx plan, very much focused on our discipline of capital allocation, focusing on the safety of the operations, also focusing on the maintenance of the sugarcane fields in the region, both in Brazil and Argentina and also in the conclusion of the E2G projects in Vale do Rosário and also, as I said, the conclusion of the refinery in Argentina. Therefore, this is a brief summary of the quarter just to give you some more light. And I think now we can go to the Q&A session. Thank you very much.

[Operator Instructions] Our first question comes from Gabriel Barra from Citi.

I just have one question. I think one of the things that drew my attention by looking at the results is that when you talk about your net debt, you mentioned that the company -- I think this is the first time I see it in your release, the company talked about a possible funding. I mean, since Nelson joined the company as a CEO in November of '24. We've been talking about a deeper turnaround process of the company. But I think in Nelson's final remarks, he talked about capital allocation, investments and sale of assets. So this is the first time I see the discussion about funding. So how are you looking at this process together with that turnaround aspect and divestments? How do we -- how should we look at the time line? And in terms of size, and considering the sale of assets, if one thing is very much related to another and whether this capital allocation will be done anyway given the fact that you will have a successful divestment. So Nelson or Bergman, if you could help me out with that, I think this will allow me to see what will be the next steps of the company in terms of capital structure.

Gabriel, this is Rafael. Thank you for your question. I will just review the context so that to clarify the answer. In our journey, we already said that this is a 2- to 3-year journey that consists of transformation and simplification of our portfolio. The simplification journey when it comes to how we organize ourselves has already started, and this has already bearing results. The journey of efficiency is quite visible when it comes of the attention given to it. And the divestment journey follows a certain pace, and this is already also showing results. The divested assets and those that we are still analyzing are all assets that in our view, have less synergies with the portfolio or the remaining ideal portfolio for us to have a focus and good profitability. So the divestment journey will continue and we are giving continuity to the process. This is something that will advance, and you will be able to see what's coming in the next quarters. So since we arrived in the company, given the fact that we acknowledge that this is not a short-term journey and the starting point when it comes to capital structure, and now I'm referring to a very broad capital structure and the quality of assets was a very challenging starting point because of the investment levels that the company had in the past years and also considering more challenging results in the past few years, we also made a decision to improve the debt profile and the profile of the assets of the company. Therefore, when you look at the debt position reported this quarter, I think this reflects our strategy, our deliberate strategy to improve the quality of our liability. But naturally, in any process like this, I mean, this is a lengthy process, and we are very confident in this process. It's just natural for us to analyze ways to reduce the risk of our plan, but by the same token, how we can expedite the journey. And therefore, we are now talking a lot about it, and we are analyzing a possible capitalization. I would like to just make very clear that right now, we do not have any details or any certainty about a potential operation. We just have a very active conversation that involves the controllers because this company has 2 controllers. Therefore, it's just natural that this requires a good coordination between Shell and Cosan so that we can evaluate mechanisms to expedite the journey and reduce the risk when it comes to reducing risks because we are very clear and confident that this will be a successful operation. But right now, I don't have any further details to share with you. I'm just sharing the rationale behind it.

Our next question is from Matheus Enfeldt with UBS.

First of all, I would like to praise your earnings release. So my question is about efficiency. I would just like to get a better understanding about that G&A reduction because if you look at that BRL 100 million or BRL 150 million in reduction that you posted in your results, I mean, that means BRL 500 million, BRL 600 million in savings during the year. Maybe in the first quarter, you had what you expected in terms of efficiency gains impacting EBITDA. My question is whether it would be fair to think about this being a recurring level going forward or whether you still see further benefits or whether you should see something similar to that or -- and whether you can also see some efficiency gains, thinking about CapEx, whether that BRL 7 billion or BRL 7.5 billion of recurring CapEx would have any impact on efficiency and SG&A also.

Matheus, this is Rafael. Thank you, first of all, for your comment. And we should like to praise the IR team for their work. About efficiency, I think we posted an efficiency guidance of about BRL 0.5 million. And the first quarter just shows that we are on the right track to deliver to what we said, and we see a recurring improvement in the efficiency level of the company in terms of our admin structure. And mainly, Matheus, to your point, this is the consolidation of this very severe discipline that we've implemented since we arrived here, and the company was focused on growth projects with incentives for people to go after new projects and new initiatives. But once we arrive here and we make clear that we will focus in our core business that we have to simplify and then we have to eliminate the risk from the business. And then once this message is then understood by all areas of the company, that's when we see gains being translated into better results in this line. And therefore, we are very confident that this new culture is quite ingrained in our teams, and we will seek for further efficiencies. And once again, we will preserve the integrity, safety of our teams, the focus on our brand because this is a very relevant brand, all of that remains. And CapEx, Matheus, comes from a period where it was quite high with big investments in several projects and what remains of that growth. CapEx is, in fact, the conclusion of the E2G projects that were already in progress. So we decided to continue with the construction of these projects and also the conclusion of investments to upgrade our refinery in Buenos Aires. Therefore, it's just natural to see a CapEx reduction. And in terms of recurring CapEx, the same mindset that is reflecting in better results in SG&A, we are certain that with time, this will have an impact in our recurring CapEx. And certainly, we are totally committed to maintaining the quality of our assets in general. Part of the portfolio actions that we are now executing will lead to a reduction in recurring CapEx. Whenever we talk about divestments or idleness of ESG mills, we are referring to assets that demand high recurring CapEx for the industry and also the agricultural side of the business. And with that, we can see optimization of recurring CapEx as a result of the portfolio actions. And in general terms, given the fact that we will continue to put great focus on our distribution -- I mean, Fuel Distribution assets in Brazil as we make important advances in ESB. In our ESB portfolio, our risk profile of the business will also show changes. On the positive side since the Fuel Distribution business has greater profitability and we also have a higher cash generation profile. And that's why we are very confident that CapEx will evolve on the positive side.

Our next question comes from Thiago Duarte with BTG.

Nelson, Rafael and Phillipe. I would like to discuss 2 points related to ESB. First, when you look at this more challenging quarter in terms of profitability, the quality of the sugarcane fields and yields, I mean, this is across the board. If you think about the Center-South region of Brazil. I would first of all, I'd like to understand whether this has any implication in your crop plan that you posted for the first quarter, especially in terms of crushing of 72, 75 tons (sic) [ million tons ] adjusting now for the sugarcane from Santa Elisa. And still on that note, not only thinking about the assets that were divested and also thinking about the next ones in terms of the new mills that you may turn idle or sell. Do you have any projection or any readings about the profitability gains that these assets that are leaving the portfolio that, in my view, are assets that are underperforming when you compare to the other 27 mills. What kind of gains that these divestments should bring to your ESB business, in terms of profitability, I don't know you would have anything that you can tell me that would allow me to project profitability going forward.

Thiago, thank you very much for the question. I will start with the first part of your question, and Bergman can add to that. In May, we released our operating plan that showed 72 million to 75 million tons. And that plan contemplated a higher challenge because we're already seeing in the quality of the cane given the scenario of last year. During the call, I referred to the drought and the fires that occurred in the second half of the year and the off-season that had lower rainfall. And this already posted bigger challenges in terms of the availability of sugarcane for this year. And this is already contemplated in the guidance projection for crushing of 72 million to 75 million tons. Today, I think we have to look from the middle point downwards given all the challenges in this will reflect on Brazil sugar and ethanol production. This may also give some benefits on the price side because even though a bigger mix in Brazil and the mix that we have at Raízen will also put more pressure on the supply and demand. But for ethanol, we are seeing price behaviors that not only reflects increase in demand for the implementation of E30, but also reflects the lower mix and a lower production or output that Brazil should have this year.

Thiago, I will now answer the second part of your question. First of all, I would like to emphasize that we like the ESB business, we see this as a very strategic business for the company. And we also believe that it could be more profitable with time, it could be more profitable because there are different avenues. One avenue is the one you mentioned, which is eventually divesting or if I take the example of Santa Elisa, maybe we can hibernate some underperforming assets. Sometimes the asset is not profitable to us due to its location, but it could be profitable to other third parties due to like optimization of maintenance structures or access to raw material. Therefore, these are assets that could be valuable to other people, to other companies that's why we have to analyze that divestment. But we also have a journey of the remaining assets regardless of the assets that will be divested or hibernated. It's a matter of efficiency. In the case of ESB, it's also a matter of productivity. I mean this journey has proven to be beneficial, but there's still a lot more to be done, and we acknowledge that. When we talk about the final result of the journey, we have to consider all these elements. Eventually having a leaner portfolio and with more synergies is crucial to us and also a scale of portfolio because we cannot let go of scale. Of course, I don't need 27 mills to have scale to optimize the operations or a production volume to have a relevant footprint in the market. So even if we have a lower scale, it will still be a gigantic scale. And certainly, this midterm job involving efficiency gains and productivity. Therefore, we are very confident that throughout the journey, the portfolio would be better with more synergies and by the same token, more profitable.

Our next question is from Isabella Simonato with Bank of America.

I would like to revisit your leverage, net debt-to-EBITDA ratio. Your moves are very clear and the purpose behind it as well. But in fact, our -- the debt position is quite high, and I understand that it should go down throughout the year as you release working capital. But I would like to hear from you. What is your view about the necessary leverage for the business, given all of the other measures that you're also putting in place? Like you talked a lot about CapEx reduction, margin improvement, et cetera, et cetera. So what is it necessary for Raízen to have a consistent cash generation over time? We hear a lot potential sale of assets and then we try to look what would be a more normalized leverage level. I would just like to hear from you, what is the magnitude in the path of your actions to arrive at a comfortable leverage? And my second question also on the subject of ESB. I know that this first quarter was quite challenging, but we saw a marginal acceleration in crushing in the Center-South of the country. But what will be the unit cost going forward in at the end of the crop season, just so I can have a better idea of how I should look at the profitability at the end of the crop year.

Isabella, this is Phillipe. I will answer the second question, and Rafael will then add to that. Obviously, in this first quarter, we go through a period where cost dilution was quite relevant. Meaning that it carries an effect to cost in the quarter, which is quite clear given the lower dilution we had. And then throughout the year, as we advance crushing and we've had some advances in the past weeks, then we can improve the metrics, certainly looking at the dilution effect and also looking at all of the other initiatives the company is doing, not only in terms of expenses, but in the operation itself, we will see over the years, I mean, in the midterm, we will see an operating improvement. This certainly will depend on crushing levels, but this will tend to be more or less affected vis-a-vis the potential of fixed cost dilution.

Isabella, this is Rafael. I will answer your first question. First of all, I would like to stress that part of this move in terms of our debt has to do with our decision to optimize liability terms at competitive costs and reinforce the liquidity of the company. At the end of June, our cash was BRL 15 billion in addition to our credit facility with international banks of another BRL 1 billion. And after the closing of the quarter, we also had additional funding of about BRL 6 billion. That was a strategic decision by the company to operate with cash liquidity levels much higher than our historical numbers so that we could face this transformation period in a more comfortable position. The initiatives that we are pursuing Isabella, and now we are beginning to show that structurally speaking, less other structural things in ESB, as you pointed out, but these are structural moves that will certainly lead to a better cash generation profile, but in terms of leverage metrics because I know everybody looks to net debt-to-EBITDA ratio as a stronger denominator. So that is a very sensitive metric. But in regards to divestments, we are obviously seeking to arrive at an ideal asset portfolio so that we could have good scale in the businesses that we want to have, while at the same time, we want to reduced our net debt position. I mean, excluding the metric, I mean, operating with high debt tends to be more costly, and that also brings in more risk rather than when you operate with a lower risk. So we want to reduce the total of net debt of the company in absolute terms. Obviously, when you look at leverage and you refer to the ideal leverage level, this involves several elements. Today, we are operating at interest levels at its peak naturally for a company with a debt position that we have, this puts pressure in cash generation. It's a relevant pressure. Therefore, we believe -- I mean, we see 2 effects, the reduction of the debt as a whole and eventually, the beginning of a cycle of further cost reductions brought about by this debt and portfolio moves that we will continue to do in our view, bring relevant improvements to the risk profile of the business. And this is certainly one parameter when we look at the ideal leverage of the company. What we are focusing on now, Isabella, is certainly a combination of all these elements that will lead the company to generate cash organically. This is not the year where this will happen because we have to make other improvements, also operating improvement and portfolio management. We still have high interest rates and high debt. But in fact, we have to see the company generating organic cash, meaning that we still have some way to go until we achieve that goal.

Our next question is from Pedro Fonseca with XP.

But before, I would like to reiterate what my colleagues said and congratulate you for the change in the reporting of the results because it's much easier for us now to do our analysis. My question is about trading volumes of sugar and ethanol. You mentioned during the presentation, all of the initiatives to probably reduce the size of the business and focus on your core business. And when you look at the quarter, I mean, if we're doing the calculation right, it seems to be that sugar and ethanol volumes were around 30% higher than the volume of your own sugar and ethanol. So my question is, would it make sense to believe that this level of commodity trading will be maintained in the next quarters, given the fact that the first quarter, maybe you would have lower availability of product? But also, when you look at the trading margin, the impression we have is that was still under pressure this quarter. And my question is, what could we expect in terms of trading margins by the end of the crop year? That was my question.

Pedro, I will answer that, and then they can add to my answer. In this first quarter, we saw the effect of everything we did in terms of divestments last year. You might recall that in the third and fourth quarters, we started to reorganize the operation of the trading sector. And so this year, we started off much more focused on the ethanol and sugar business. Obviously, we don't have any guidance or any reference to share with you in terms of how much volume of trading quarter-on-quarter because this certainly goes through all the opportunities we see in the market. But what I can tell you is that we will maintain operations that are related to our core business. So eventually to originate ethanol and to sell ethanol thinking about the integration that our business have makes sense. So looking at the sugar market for reselling and trading, we will look at things that are related to our core business. And these operations tend to bring about less volatility and less risk to our balance sheet. From now on, what you should see are lower volumes when compared to what we did in the past in terms of reselling and trading, but profitability is much more adequate to this type of operation. This quarter, if you compare it to the first quarter of last year, you will see an evolution in trading results, and they are contemplated in the EBITDA explanation from our earnings release, and this is part of our global sugar and ethanol business.

Pedro, I will just adds to what Casale said. First of all, I'll say that the changes we've made maintain trading as a very strategic part of our business. It's simply no longer a separate unit of the business. And now since this is very strategic to our business, it is mainly related to the main businesses of the company. So we say that this is a very capable area with good intelligence to originate the products we need for our distribution network, and this is crucial to the strategy of our business. This is something that we do not let go. And to the ESB business, this is an area that has intelligence and the commercial reach to maximize the value of the products we sell. While at the same time, we maintain the market channels well supplied, and that's why Casale said that we will continue to originate ethanol. This will remain crucial to us, obviously, with an aggregated risk profile, which is lower than what we had in the past. Now we prefer to be less exposed to risk and less exposed to upside risk as well because we are focusing on derisking, but we will ensure the trade value to the main businesses of the company. Thank you, Pedro.

The Q&A session is now concluded. Questions in writing that were not answered during this presentation will be answered by our Investor Relations team. Now I'll turn the floor back to Mr. Nelson Gomes for his final remarks.

Well, thank you once again for joining us today. Thank you for your interest, for your questions and for the feedback. Please, I urge you to keep sending us the feedback to our IR team because this will help us in our simplification journey, and this will help us to improve our communication with you. On our side, we will remain focused on our operating plan and our investment plan. And mainly, we are focused on the continuity of all structural advances that we need to do to support our long-term strategy, therefore, count on us. Any follow-up questions, please talk to our IR team, and I hope to see you in our next earnings release presentation.

With that, we conclude the first quarter presentation for '25-'26 crop year of Raízen S.A. The Investor Relations team of the company is available to clarify any additional questions. Thank you for joining us, and have a very good afternoon. [Statements in English on this transcript were spoken by an interpreter present on the live call.]