São Martinho S.A. (SMTO3) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to the São Martinho S.A. Conference Call to discuss the results for the First Quarter of the 2026-'27 crop year. With us today are Mr. Felipe Vicchiato, CFO and Investor Relations Officer; John Graham, Head of IR, and the Investor Relations team of São Martinho. The audio and slides of this conference call are being broadcast simultaneously over the web at www.saomartinho.com.br/ir. [Operator Instructions] Please be advised that certain information contained in this conference call may contain forward-looking statements. Such information is subject to known and unknown risks and uncertainties that may cause such expectations not to be realized or to differ materially from what was anticipated. Now I would like to turn the floor to Mr. Felipe Vicchiato, who will initiate this conference call. You may proceed, sir.

Good afternoon, everyone, and thank you for joining us this afternoon to discuss the results of the first quarter of the crop year, '26-'27. On Page 3, these are the main topics that we will discuss today. We will start with financial highlights. We will talk about margins per product. We will talk about the developments through the quarter. And over the year, we will talk about corn processing. We will talk about the main markets of the company, sugar, ethanol. And finally, our debt position and how we stood at the end of the quarter. Well, the first quarter of the '26-'27 crop year had an important impact on sugar prices quarter-over-quarter. There was a 25.7% drop. Last year, in the same period, the base had high prices. It was the best prices we had last half year. I mean, BRL 4,100 per ton. I mean, last month, it was the opposite. We anticipated shipments in the first quarter. And so the average fixed price or hedged price was much worse than all of the other hedges going forward. Therefore, this comparison was 25% lower, and this had an impact on the EBIT and EBITDA margins, as you can tell from the financial highlights. Moreover, this quarter had a relevant rainfall in June, and this affected the entire industry with many downtime and this impacted TRS, naturally then impacted the whole operation and this hurt the agricultural yield and also our efficiency. And this also had an impact on our fixed cost. So summarizing, there is a drop in the EBITDA margin down to 8%. It went from 17.8% to 8%. And our cash income went from BRL 147 million, and there was a drop of BRL 9 million. In the case of ethanol, price drop was not so significant given the fact that we were able to anticipate ethanol sales in the first 15 days of April, when prices were not so low. And then when prices came down, and the 45 remaining days of the quarter, so the average price was not so bad. However, there was a major impact in sales, which was down by 23% vis-a-vis the previous quarter, and this certainly had an impact on our sales volume and this impacted admin expenses and also was reflected in the company's profitability level. Next, we have the margins per product in the case of sugarcane. We start from a significant drop in margins mainly due to the average price. As previously mentioned, our cash cost was down by 9%. Part of that is due to a slight cost reduction and also due to Consecana. So all in all, the margin was minus 4. So the margin is 1.9%. Cost was down, and so price was down as well. Whenever we talk about product margins, we are only referring to the sugarcane business. I mean, sugar and sugarcane ethanol. I do not have corn-based ethanol, but we will look at those figures during the coming slides. Once we add both of them, the result is almost 5% in the equivalent cash cost. How do we calculate cash cost? For the year, how do we calculate that estimate of cash costs for the year. This is an important question because some of the reports that I read on the sell side from our initial estimate of drop in the year, the first quarter accounted for almost a relevant part of this drop. But I just want to make -- I just want to clarify how we do that. Our cost estimate for the year is based on the production volume of TRS, which is usually our guidance. So there, we have an initial production guidance. And this year, this guidance was 23.7 million tons of sugarcane that we expected to produce with a TRS, total recoverable sugar of 3.3 million. This assumes TRS of 142 kilograms of TRS. So based on this produced TRS, I have a cost associated to that production. And this cost involves labor, diesel fuel, fertilizers. I mean all of the agricultural inputs and also the operational CapEx, which is the guidance CapEx that we disclosed at the beginning of the year, the crop year. So earlier this year, we said it was something close to BRL 2 billion in terms of maintenance CapEx. So what could change in terms of my unit cost for the year? The first thing that can change is whether it might cause increases, nominally CapEx or operation and the information that I have today is that this cost might be even slightly lower from what we are anticipating. So labor cost is within the plan, the diesel fuel cost was up, and now it's down. It will even be nominally lower than the estimates. The same thing goes for inputs. Meaning that we are within our estimates and within the plan. But however, the effect of this very strong El Nino could probably reflect on our TRS. I was anticipating total TRS within the guidance and the number would be very close to 11%. So if I grow a little bit more than that, if El Nino remains very strong, my cost per TRS will be higher. This is monitored on a day-to-day basis. We will learn more about it by the end of the crop season in November. And I think this year, the crop will be extended a bit more because there will be a few days of crop slowdown or shutdown. So this is pretty much how we calculate the TRS cost. I think in our last call, our estimate was in the range of 7% to 8% less in terms of costs. So the number today is about 4% lower, given all of the impacts from TRS, lower TRS and also combined with what we see today. Therefore, today, we believe that we will have more cane. I mean, the cane volume will be higher than we anticipated. It should reach more than 24 million tons, meaning that all the investments in CapEx, in sugarcane crops and adjustments throughout the past few years is now bearing fruit. However, TRS will be lower because of El Nino. It's very likely that this lower TRS, especially now in the month of July and August. Cane is quite high. I mean the volume is large, but it's very watery. And if you have a spike in TRS because that's indeed is when you produce more sugar in these months, we see that the industry is producing less sugar. All of the estimates for sugarcane production, just to anticipate the discussion that we may have when we come to speak about hedging. All of our sugarcane production estimates in the Center-South region that we had a few months ago, I think this expectation should be reviewed and the numbers should be lower because TRS is dropping quite fast. And it's very unlikely that TRS will be able to recover. So it will be -- we will have a lower TRS because of El Nino. It's hard to estimate the volume, but I think that the margins will be worse. So I believe that sugar prices have recovered a bit in the past few weeks. Based on these expectations coming from Brazil, I mean also given the fact that we had heavy rainfall. And also, this has to do with the sustainability of the business. As you can see, if you look at São Martinho's reported costs for the first quarter with realized prices, I mean this is before financial expenses certainly. So we have a 5% negative margin for sugarcane. This cannot be sustainable, but we also believe that we find ourselves in the first quartile of operating efficiency. Therefore, it's not reasonable to believe that sugar prices will be in the range of BRL 0.13 to BRL 0.14. This number has to be much closer to BRL 0.18 in order for us to continue investing and maintaining our sugarcane crops. Now moving on. Now we talk about our corn processing operation. It's moving quite well. Quarter-on-quarter, there was a drop in EBIT and EBITDA, mostly due to ethanol prices that was a bit diluted and also sales volume, but the margins were sustained. As a reminder, we didn't have, in the case of ethanol, any impact in terms of buying chips. So this P&L. In this P&L, we reported cost 0. EBIT margin is mostly due to drop in revenue because [ I sold ] the last ethanol when compared to the previous quarter and also at a lower price. And prices of corn were also lower quarter-over-quarter, which helped maintain the margin. If you look at the Phase 2 schedule for corn-based ethanol is moving according to plan. I think the plant will start ramping up next year. And we will start producing something in the midst of May or June. Now our hedge position. In June, our hedge position for the crop year is 554 million tons. And this is with an average price of $15.78. So price per ton would be very close to BRL 2,000 per ton. We've hedged exchange rate and spot as well for the following crop year. We only had 20,000 tons hedged. And if we separate '26 and '27, we weren't too hedged when you look at March of 2027, which is the longer view. So this price increase that we saw in the past week is good because maybe we can take advantage of having numbers closer to BRL 0.16 to BRL 0.17, and this can help the average price of the crop year. For next crop year, this rebounding price is important. Certainly, we anticipated hedging of the 20,000 tons with that improvement in price, but not that much and it's still very far from that 20% to 30%. We understand that there -- we had the effects of the El Nino. There is also the issue of the business sustainability, meaning that we still have a lot to look at before we make a decision whether we will accelerate or not the sugar hedges. Speaking about the mix, it's very clear today when we look at hydrous spot in the market and spot sugar in the market, premium is much higher for sugar. But the main question how much more sugar you can produce given the fact that the sugarcane currently has a much lower TRS. So that is the big question mark that we have from now until the end of the crop year. I mean the ethanol market now, ethanol market, I mean, the market is very dysfunctional, I would say, since early April, ethanol prices were down a lot for many given reasons. Let's say, I think one of the main reasons has to do with production volume. There was an increase in corn-based ethanol going from 9 billion to 11 billion liters. So 3 billion liters more in the market. And there is also a sugarcane-based ethanol [ heating ] the market because of the larger sugarcane crop. But the question now is, I mean, we knew prices were coming down. But the question is how come consumption hasn't reacted yet? I mean, price was down from BRL 3 to BRL 2.1 ESALQ prices. So there was a decline of around 30% to 35%, parity is close to 61%. And at this level of parity of 61%, we should see a response from the auto cycle in the range of 32% to 33% of cars consuming ethanol. But we are realizing that this is not happening. We think it's just a matter of time because it takes a bit longer. This already happened in previous years. I mean 2, 3 years ago, there was a significant drop in prices. In the last quarter, there was a sudden drop in prices. There was no demand. I mean it took some time until demand picked up. Our strategy now -- I mean, since we have a lot of ethanol in our mills, we are storing whatever we can in an attempt to sell it when prices are a bit better, and when consumption picks up because consumption is still low. So this is the idea. We are talking to associations, [indiscernible] and UNICA. They are advertising a lot. They are advertising in several media outlets. We are pursuing many different strategies. So you will see ads in different outlets. We want consumers to go back to ethanol. As for the international market, we don't have a big window for exports. Therefore, we will rather look at the domestic market for now. And finally, our debt position, just to conclude. That was BRL 5.2 billion, a 5% increase when compared to March. So it's BRL 248 million of increase. The main items that impacted debt was working capital, inventories, predominantly ethanol that we are holding back. And our corn-based ethanol plant that is included in our CapEx. And despite the fact that this was more -- this was a quarter with more difficulties, we were able to post cash generation. If you look at the numbers, we sold hydrous ethanol. And as I said in previous calls, we are producing more hydrous ethanol because cash generation is better. We anticipated sugar sales to improve our cash cycle with these sales so much so that we were able to generate cash. Our liquidity level is very good, almost BRL 5 billion. We don't have any relevant maturities in the next 2 years and net debt to EBITDA ratio is around 1.6x net debt over EBITDA. So these were my initial comments, and now I'll open the floor for questions. Thank you.

[Operator Instructions] And our first question comes from Henrique Brustolin with Bradesco BBI.

Vicchiato, I have two questions. My first question is about this crop year's guidance. I understand you did not review it yet. I just want to get a better understanding of your initial comments. TRS, given the rainfall volume, as I understand, there is a risk of not growing that 3% of unit TRS. But you also said that you have more available sugarcane. And I also understand all the difficulties brought about by the El Nino phenomenon. But do you see any room for you to go above the guidance limit considering sugarcane crushing or whether it's still very challenging if you look at your current crushing level so far? This is my first question. My second question is just clarification. You mentioned that unit cost is 4% lower with a lower TRS. This 4%, was that a reference based on what you had in the first quarter or it is the new expectation for the year considering that TRS is now lower? I just want a clarification about that point.

Well, thank you for your question. I mean I'll start with your last question, 4% vis-a-vis the closing of last year. We thought that it would be 7%, but now we are saying that it could reach 4%. Now as for our guidance, we didn't review the guidance because there are still a lot of moving parts at play. So we have more sugarcane, lower TRS. We don't know whether we would be able to crush all this cane. If we can crush all this sugarcane. I mean you have lower TRS, but you would have more product. But I think it's very unlikely that we'll be able to crush all of this sugarcane. I mean unless the crop year will be very stretched, very long, and I would have to count on my good luck with the rainfall thing because I hope -- I can hope for last rain. But for now, it's still too soon to tell. We are approximately 6% below our budget estimate. So if we reach 6%, I'll be able to give you a better estimate or a better idea.

Next question from Gabriel Barra with Citi.

I also have two questions. I think my first question is about ethanol. At the beginning of the crop season, ethanol was more profitable than sugar and the mix was more towards ethanol. And as you said it yourself, you talked about your hedge position that you increased hedging, sugar hedge. And so maybe my question has to do with your mix. When you look at the remainder of the crop season, and I mean could we say that this crop season will be more sugar than ethanol in the mix? So you should see a more positive sugar position and the worsening of the ethanol side. How do you see that possibility? And the second point, even thinking in more structural terms for the industry because I think now it's a very challenging time considering that you have cost pressure, low prices and very uncertain climate landscape. So the whole industry is struggling and there is a big player who is in the midst of a reorganization process. So my question is whether you believe this consolidation process will be accelerated given that now people are going through more difficulties. And how do you see that even in terms of consolidation, margins, returns, maybe this would be a point of inflection for the industry that maybe should be taken into consideration. So what is your view about that?

Well, to answer your first question, I think speaking about the mix, it has more to do with the fact that if the mills can produce more sugar than ethanol. The volume of sugarcane is higher today than what the mills can produce. And there is also the issue of availability of crushing days. What will happen from now on is okay, it's dry. Can you crush? Then the mill will try to process as much sugarcane as possible, and it will produce as much as they can. So I will say that with the current TRS, we cannot have a max of sugar mix because TRS is very low. Therefore, efficiency levels are much lower. But of course, if the premium is 25% for sugar and with the current volume of ethanol and stock and prices where they stand, I mean, whoever can do more, we'll do more. But the question is, is it possible. I think from what we are seeing, it's not possible. They won't be able to produce a lot more sugar. It will -- the level will be much lower than the initial estimates, about 2 million below the current estimates. But we still have some time ahead of us. But if we look at the estimates of a super El Nino and a lot of rainfall, and if this is confirmed, just forget about it. We won't have all that sugar. Therefore, the speed of which sugar prices increased, that may not occur, but it will certainly depend on the volume of rain. Now speaking about the industry's consolidation, to answer your second question, whether we will see further consolidation of this industry. I mean taking into account the financial situation of some of the players, I think that's very unlikely. I don't think that's going to happen. In practical terms, the fact that I consolidate a meal or buy another plant. This is not going to make me more efficient. That's a lesson that I think everybody already learned but learned the hard way. Okay, I can crush more. But am I more efficient? Not necessarily. You might have a little bit more efficiency if you buy a sugar crop right adjacent to yours. You cannot add a lot more labor per hectare. You have to increase yield per hectare. You shouldn't be able to -- I mean, you shouldn't add more industry to that. Then you may have some synergies and increase yield a bit. So in this case, consolidation would make some sense. But general consolidation with big players buying, no, I don't see that scenario.

Next question is from Leonardo Alencar with XP.

Felipe, I just want some help here because we talked in the past that you expected the crop season to occur very strong and that's why ethanol prices fell very quickly, even more than we expected because you sold in April, and then you started to hold your sales a bit. But looking at the numbers of the sector, I mean, inventory levels are higher than the historical numbers, May and June. June, there was the impact of crushing because of rainfall and this probably corrected that inventory level. What is your reading given this scenario? Do you think -- do you expect any catching up? Do you think that inventory levels will be above historical levels? And what -- do you see any potential reversal between sugar and alcohol in the mix? So maybe in the intercrop period, you would have price pressures. And going on the opposite direction, is there any given price level that would allow you to carry over ethanol prices? You said something in the past. Maybe you talked about why, is it taking too long for demand to pick up even though parity is very low in several regions? I just want to understand your strategy a bit better.

Leo, thank you for your question. I think speaking about ethanol, inventories will go down, but not too much due to production dynamics, but more related to consumption dynamics. As I explained in the previous slide, today, in June, parity was 61%. And this is an average for Brazil because in some other regions of Brazil, parity was lower than that. And consumption is not even picking up. It's still in very low levels. If you look at the historical series of the auto cycle. So it's difficult for us to understand it sometimes. There are some clues, a lot of noise, a lot of misinformation. People saying that ethanol is bad for the engine of the car. So a lot of misinformation, a lot of noise. And also with the war, I mean, and also the government saying that they would put some exemptions in the gasoline price. And then people thought that in Brazil, we had the cheapest gas prices and people started consuming more gasoline. So there are lots of noises in the market. And it's difficult for us to keep track of everything. But the fact is that prices are very low. Consumption for [indiscernible] hasn't gained traction. We are not seeing anything happening, and this is totally an outlier because when parity was slow in the past, consumption would react promptly. But the inventory can only be lower once we realize that consumption is getting stronger. Otherwise, our inventory levels will be higher.

At any given price, do you think that the situation would be reversed?

Well, I cannot say anything. I cannot give you that answer.

Next question from Thiago Duarte with BTG.

I have two questions because most of my questions were answered. So I have a very practical question. First, when do you start buying corn to expand Boa Vista's capacity that will start up in the second half of next year, just so I can think about working capital dynamics. When should I start seeing your corn inventory growing in addition to what you need for your current plant and the corn that you will crush next? And second question is how much of the inventory you can carry over? Thinking about ethanol, I mean, linking with the previous discussion, if you're carrying over your inventory to the next crop season, how much you can carry that through, even considering the fact that it's difficult to migrate everything to sugar because of climate issues and many other reasons?

Okay, Thiago, thank you. I can carry approximately 500,000 cubic meters of ethanol. I mean considering my static capacity, I mean, the tanks and I should start buying corn in the next inter-crop window because the plant starts operating in June of next year.

Next question from Matheus Enfeldt with UBS.

My first question is also very short. Thinking about the midrange and the mix, I think in the next crop season, we may see the same scenario. My question is, if you do not make any adjustments through your crushing capacity, there may be an adjustment in your mix capacity. I mean in the past, I remember you had the capacity to invest more in your sugar mix. What are the necessary conditions for you to introduce a sugar plant at Boa Vista to increase the sugar mix in your current plants? Even thinking about a scenario where sugar will pay off better and ethanol will still be under pressure in the next coming seasons? And then my second question is about the monetization of tax credits. You were accruing tax credits in a more significant way. If you look back 2023, the recoverable line went from BRL 0.4 million to almost BRL 1.2 billion. So the question is, how do you see the schedule of tax credit utilization? And whether you were preparing yourselves to the tax reform. I know that you have a small exposure, but how are you getting prepared to face that reform?