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Edited Transcript of SMTO3.SA earnings conference call or presentation 13-Aug-19 6:00pm GMT

Q1 2020 Sao Martinho SA Earnings Call

Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Sao Martinho SA earnings conference call or presentation Tuesday, August 13, 2019 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Felipe Vicchiato

São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers

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Conference Call Participants

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* Alexandre Pfrimer Falcao

HSBC, Research Division - SVP

* Fernanda Perez Da Cunha

Citigroup Inc, Research Division - Senior Associate

* Lucas Ferreira

JP Morgan Chase & Co, Research Division - Analyst

* Luiz Carvalho

UBS Investment Bank, Research Division - Director and Analyst

* Rodrigo Reis de Almeida

Santander Investment Securities Inc., Research Division - Research Analyst

* Thiago Callegari L. Duarte

Banco BTG Pactual S.A., Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to São Martinho S.A. conference call to discuss the results of the first quarter of the '19/'20 crop year.

Today with us, we have Mr. Felipe Vicchiato, CFO and Investor Relations; and Mrs. Aline Reigada, Investor Relations Manager of São Martinho.

The audio and the slides of this call are being broadcast simultaneously on the Internet at saomartinho.com.br/ir. (Operator Instructions)

We would like to inform you that some information conveyed in this call may contain projections and assumptions about future expectations, and these forward-looking statements are subject to known and unknown risks and uncertainties, which may lead these expectations not to materialize or be substantially different from what is expected.

Now we would like to give the floor to Mr. Felipe Vicchiato, who will start the conference.

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [2]

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Good afternoon, everybody, and thank you for participating in São Martinho's call about the first quarter of the '19/'20 crop year.

We will start the presentation on Page #3 where we have the agenda for today. The first thing we would like to tackle is the adoption and the impact of the IFRS 16 on the accounting of São Martinho, then we will talk about the operating highlights for the quarter and a little bit about the expectations for the crop year until the end, then financial highlights, costs, indebtedness, hedge position and some words about the dynamics of the ethanol market so far.

On Page 4, we have a summary of the assets and the liabilities of the company after the adoption of the IFRS 16 in the São Martinho accounting. Assets and liabilities, increase the database March '19, which is a starting point by BRL 2.1 billion, both the assets and liabilities. In fact, the present value of all lease contracts of the company and land partnerships of the company and the present value of its lease was about BRL 2.1 billion, and this gets under liabilities as a contract obligation and in liabilities as a right to use. From the accounting viewpoint at each quarter, we amortized the liabilities like an amortization of a debt. And this is the reason why this expense goes to financial results. And on the assets, we amortize this on a quarterly basis but according to the volume showed in the quarter. So this is one of the main reasons why there is a mismatch when you look at the P&L, the expenses on one side and the other.

We have the IFRS impact here. And here, we have a column with the figures before the effect of the IFRS, the impact and the new base balance sheet after the effect of the IFRS. Basically, we see an increase in the gross profit of BRL 4.8 million due to the increase in the expenses of depreciation. BRL 51 million, which is the amortization of the right of use, which is the amortization of the assets. And the nonleasing of the recurrent expenses of the agricultural liability and lease. So it is like a credit. This is why we have an increase of BRL 4.8 billion in our gross income. And another important effect are the BRL 12.1 million in the financial results, increasing financial expenses and this is the adjustment to present value, which is amortized based on the obligation for the ease of the land partnership. So net for this quarter, we have BRL 4.8 million negative in the balance sheet, which is an expense with no cash effect simply to comply with the rules of IFRS 16.

A book EBITDA of the company due to these adjustments increases by BRL 56 million from BRL 357 million to BRL 413 million. But based on that, we have our adjusted EBITDA, including this effect and excluding the other effect that we always adjusted through to the market in order to show the recurrence, which is part of the business, and we get to an adjusted EBITDA of BRL 348 million. Started from there, we start to give you details in the financial statements and the call, all in the same comparison, basically, excluding the effect of the IFRS 16, given they are -- that they are book effect and they have no impact on our cash flow.

On the next page, we start on Page #6 with the operating highlights of the company. The first quarter, we crushed 9 million tons of sugarcane, a drop of about 5% on a year-on-year basis. Yields, about yields increasing over 12%, which has an 89% TRS, dropping 7%, 122 kilos of TRS. And the reason why we had less -- we crushed less was because April had a lot of rainfall in the few weeks -- in the first weeks and the harvest started to get back on track around late April. And in a comparison -- on a year-on-year comparison, we had a very bright weather so there is a lower production of sugar and ethanol. For this reason, the production of sugar growth is 7% percent. We started more towards sugar.

And we had contracts to comply with ethanol, dropping 21% production because of the Boa Vista Mill, which was stopped for more days during this period, and it is 100% ethanol. The ethanol produced was 11% lower than in the previous crop year.

As we said in the financial statements, we maintained the guidance for production, 22 million tons of sugarcane. And we are already on track. We are on budget. Today, in the last couple of months, we've had a very dry weather and the mills are pushing even high more than their nominal capacity. So this is why we are relatively profitable in terms of delivering 22 million tons with no major problems.

As we informed in July, São Martinho was impacted by frost. 12,000 hectares of the company were impacted by frost. Today, we have already closed all the harvest of these hectares, so with minimum impact on our yield. And this is the reason why we are maintaining our guidance according to our initial estimates, and fortunately, it was a very light frost, differently from a couple of years ago. And this lower production of TRS equivalent, we will see during the presentation, it had a direct impact on our production cost for sugar and alcohol as we have a fixed cost in terms of machines and labor, et cetera, and with the lower production. And when you have the result of the quarter, you'll see apparently an increase in the production cost. But over the next few quarters, as soon as production is on track and we reach 22 million tons, our estimate, this will be diluted by the end of the crop year. So this is an important point, and it has more to do with the quarter than with the structure for the whole crop year.

On Page #7, we see the financial highlights of the company. Net revenue dropped 2% year-on-year. Basically, we had 13% less volume sold of sugar in the quarter with 3.6% less in the price of sugar and the higher volume of -- lower volume of sugar shipped mainly because of a very high base in the last quarter in part of the inventory of the '17/'18 crop year was only build in the '18/'19 crop year. When you compare quarter-on-quarter, you'll see a higher base, that is to say, in spite of the fact that we increased production of sugar, when you look at these figures, you can see 13% drop in the volumes sold. Besides, a lot of the sugar of São Martinho is carried over to be sold in the screens of October and March because they have higher prices. So with the second half, we will see levels close to the first quarter and then the third and the fourth, we will see a volume of sugar sold going up quite cheaply because of better screens. When we look at the future screen for October up to March in a comparison with the May screen, that have already expired.

Adjusted EBITDA dropping by 2 -- BRL 348 million with a margin of 46%. EBIT margin, 15.7%. Beside the drop from the EBITDA, you have an increase in the depreciation expenses due to intercrop expenses last year. And cash or net -- cash income, BRL 66 million.

Ethanol, 6.7% higher price in the comparison year-on-year. The volume was 2% higher and the improvement in the price of ethanol in quarter-on-quarter comparison was -- in April, we had these figures for ethanol. We migrated as much as we could towards ethanol in April when we were able to sell as much as we could in April. And soon after, prices became more stable and then we resumed production according to what was expected regarding the estimated mix.

Cogeneration prices, going down 4.6% because of the spot market, they have dropped because of the rainfall. And the volume dropping 6.4% because of the lower crushing in the quarter, and that will be offset in the next quarters because the volume is maintained at BRL 22 million.

On the next quarter (sic) [page] we have a summary of the main impact of the EBITDA cost per TRS sold. Since the financial statement and in many analysis, we can see that it goes up close to 15%. We have a summary of the main factors involved separated here, 8% because of the drop of production. We crushed less, so we have less TRS sold, so your unit cost goes up. In the quarter, and this effect will be diluted over the next few quarters, 4.1%. Variation of Consecana prices of sugar and alcohol went up vis-à-vis the previous quarter, so in '18/'19, you had a volume of hedge of sugar already realized with the price of Consecana quite low because sugar was dropping quite steeply at the time. So comparatively, quarter-on-quarter, this ultimately increases 4.1% Consecana. And here, 2.4%, other effect, noncash effect mainly in administrative expenses that we detailed in the financial statement.

On Page #9, we have a summary of our indebtedness. The company closed June with BRL 2.5 billion net debt, an increase of 6% vis-a-vis March '19. 70% of this debt in local currency, 30% in foreign currency. The increase in the debt comes from the increase in the working capital in the period. In order to keep the ethanol and sugar inventories, and this is part of the business to carry a relevant inventory for the next few quarters. And the debt amortization schedule, BRL 1 billion short-term debt, BRL 2.2 billion. So no need for financing because our cash position in June '19 was BRL 2.2 billion. So in April, we paid the second half of the CRA that we issued, and this is one of the reasons why cash is maintained at this amount of BRL 2.2 billion in spite of the increase of the working capital and should be zeroed until we sell 100% of our products.

On Page 10, we have a summary of our hedge position. So for the '19/'20 harvest, in June, we had 78% of our own sugar already locked. And looking at the long range for sugar production, I think it is 1.050. And for the next harvest, only 32 million tons at BRL 1,269. Both sugar of '19/'20 and '20/'21 is matched -- or the volume of sugar is matched to the volume in dollars.

Our expectation is that the price of sugar will become more stable in the next weeks at a level that it is today, and as soon as the Brazilian harvest goes on, and it is -- will probably more -- lead more towards alcohol or ethanol than sugar. And we expect the price of sugar to improve mainly in the March '20 screen. It is very difficult to say how much it is going to go up and what is the proportion, but this combination of Brazil removing 10 million tons of sugar potentially in the system, even with a production -- a very relevant production from India, for instance, we expect prices to recover from today until the end of the current year.

On the next page, and just to close the call and before we open for questions, we have the price dynamics of the ethanol market. The demand for ethanol continues to be quite strong. When we analyze the last 12 months of consumption, 30% more consumption. In currency, parity is close to 63%. And in April, the price reached BRL 1,900, 77% parity. And we expect this harvest to be more towards ethanol than sugar for the sector so the production volume will be enough to supply the market. But we expect parity to have a more normal behavior, differently from the last growth year in which in the middle of this intercrop period, the prices dropped. And for this harvest, we expect the swing between crop and intercrop go back to normal. And in the next intercrop period, it could -- it should go toward 70% and not having such a drop as we had in the previous one.

São Martinho's -- well, in the volume of ethanol over the quarters, our expectation is not to carry over a high volume of ethanol such as was the case during the last crop year to sell, it was almost 60% of the total production, so we will be selling our production in a more linear fashion. Of course we are going to carry part of that, but not as much as we did last year. First, because of the price is that our currency better than 1 year ago, and this gives us a certain profitability and comfort to sell. And secondly, because, of course, we do not know what will happen with the oil price and the price of oil could go down, and we would have to sell a certain volume of ethanol at a lower price than we have today.

So this is the summary of the call. Now I would like to open for questions, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Rodrigo Almeida from Santander.

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Rodrigo Reis de Almeida, Santander Investment Securities Inc., Research Division - Research Analyst [2]

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Felipe, could you -- I would like to ask a question about the ethanol inventory. I believe the differences from the remainder of the market, you have a higher inventory and even producing less and having relatively high prices during this quarter. So could you explain a little bit? And another question regarding the precatórios of Copersucar, I would like to better understand the timing. And could you give us an update of the precatórios or preorder credit note?

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [3]

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In fact, we did not build a bigger inventory of ethanol than the last quarter. It's about 45% less, in fact, in this quarter in inventory on a year-on-year comparison. It is quite the opposite. In a comparison, we sold more than the same period last year. If I take my inventory of 1Q '20, I only have 60,000 of ethanol, and last year I had approximately 240,000, so I sold quite a lot. So our ethanol inventory is not as high as that.

(technical difficulty)

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Rodrigo Reis de Almeida, Santander Investment Securities Inc., Research Division - Research Analyst [4]

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There was a problem with the line, so could you please repeat?

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [5]

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In terms of the inventory, we have 40% less ethanol inventory in this quarter on a year-on-year comparison. We are not carrying a lot of inventory based on the production that we have already had and the sales that we had in the first quarter. And as I said at the end of the presentation, over this crop year, I will probably be selling or carrying less ethanol than we carried during the last crop year. And the second, having to do with the preorder credit notes, or the precatórios, as we explained in our explanatory notes, the deposit has already been made in the court, and Copersucar -- and the lawyers are making their best in offers in order to liberate. And we expect by December to be able to have this already concluded.

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Rodrigo Reis de Almeida, Santander Investment Securities Inc., Research Division - Research Analyst [6]

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Very quickly. Let me understand the remainder of this payment of the precatórios, the preorder credit notes.

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [7]

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It would be 5 different installments, 5 installment this year.

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Rodrigo Reis de Almeida, Santander Investment Securities Inc., Research Division - Research Analyst [8]

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Do you have any information about how this would be paid?

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [9]

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When you're talking about 2 preordered credit notes, they are paid 15% in the first installment and then an additional 5 equal installment this year. We are receiving the second installment of the first and the second. You can contact our Investor Relations team and they will give you details. But nothing has changed. That's exactly what was published last year.

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Operator [10]

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Thiago Duarte, BTG Pactual.

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Thiago Callegari L. Duarte, Banco BTG Pactual S.A., Research Division - Analyst [11]

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Felipe, I would like to ask 3 questions. The first one has to do with the sugar scenario. In the last 2 months, we have been seeing a change in the surplus for this harvest going towards a deficit next year because of production in India.

(technical difficulty)

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [12]

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Thiago, are you using a cellular phone? Because the sound is very bad.

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Thiago Callegari L. Duarte, Banco BTG Pactual S.A., Research Division - Analyst [13]

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The sugar scenario, some consensuses have a lower expectation regarding production for -- because of India, European Union, Brazil. Ethanol being more profitable than sugar today, and I would like to know your opinion about the trade flow. What do you believe is holding back the prices of sugar at low levels? And do you imagine this will improve in the future? I would like to know the company's opinion about that. The second question has to do with the Renovabio. There is an expectation that it will finally be implemented. And what about the certification and a practical effect once it really becomes operational next year?

And lastly, a question at the medium and the long run. Last year, when you held that event that was in São Martinho, and you talked about the medium and the long-run expectation for crushing for the company, I remember that you made a curve, you graphed a curve of 22 million getting to this crop year. And for '20/'21 and '21/'22, maybe reaching 23 million or 24 million, and we had hydro stress in many of the last years and this had a negative impact on the quality of the sugarcane field. So this hydro situation would have to go back to normal. Maybe it's a little bit too soon to talk about that, that are you comfortable today considering the rainfall or the late rainfall that we had in the intercrop year than the beginning of the crop? Are you more comfortable to talk about this recovery curve in one way or another?

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [14]

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Thiago, thank you for the question. In relation to the sugar market, it is true. With a lower production in India, in Europe, in Brazil, and probably this will go back to a more balanced situation with a deficit in the production of sugar. But what is really -- what really has a bearing is the volume of inventory, and the large importers are not importing because of the large inventory that they already have in their hands. And this is the reason why we do not see a very strong price recovery. But we believe first that Brazil should have 25 million tons, not much more than that. And on the next crop year, considering the current oil prices and the ethanol dynamics that we have today, we believe that Brazil could repeat a more ethanol-oriented crop year in '20/'21. And there would be, maybe some room for prices to recover. And this is the reason why we're not hedging very quickly the next crop because we don't have a downside in terms of remaining at this price level.

And second question about Renovabio, São Martinho expects to have the 4 units already accredited probably in December or by the end of the crop year. We will be ready to be able to sell, but I cannot really tell you the price and what will be the impact on the P&L. But São Martinho is ready to go. And by the end of the year, we should have all of our units already certified.

Regarding the crushing and our business land, and we are very comfortable. We believe this will happen. And the planting of presprouted seedlings with Meiosis. We already have about 10% of the total area being planted or planted 18 months ago with presprouted seedlings. In fact, the yield of cane is about 7% higher than the yield of a conventionally planted harvest. In 3 years' time, we should have between 50% and 60% of the area harvested -- planted in presprouted seedlings with Meiosis. So only in this gap of higher yield and in relation to conventional, we add about 600,000 tons of sugarcane.

So our expectation is to have 22 then 23 then 24, and we are quite comfortable with these figures. And the long-term expectations, we will even have more sugarcane than the industry in which will be a challenge for us because we have to remove bottlenecks from the industry in order to crush more. But the original plan of 22, 23, 24, over time, as we informed during our site visit, is to up. And the results are even better than we expected in terms of yield.

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Operator [15]

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Luiz Carvalho, UBS.

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Luiz Carvalho, UBS Investment Bank, Research Division - Director and Analyst [16]

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Felipe, I have a few questions, and maybe I will be going back to a few things that you have already talked about, maybe. Capital allocation. In the last call, there was a question about your possibility of paying dividends and heavy share buyback and maybe go towards acquisitions. So could you talk about each one of these possibilities and give us an update about each one of them? And still about the same subject, what about the corn ethanol unit?

And the other one is about Renovabio. And that I apologize because I'm going back to Thiago's question, what about the certification process? And when could we see some impact, a direct impact on the company's bottom-line, your target for 2020? So what is the most recent update about that? And the last point, on the operating side, in terms of the regulatory changes that are being proposed, could you talk about import, tax rates and the impact on São Martinho, et cetera?

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [17]

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Thank you for the questions. I will start by the last one, the issue of mono phase. UNICA is discussing with the government. UNICA represents the whole industry and is talking on behalf of the whole industry, and we are totally against this thing of mono phase. And the debate is going on, it is already underway so I have nothing to add to what you already know. We believe it is nonsense, and the idea is to keep things as they are today in terms of taxes between producers and distributors.

In relation to quotas, well, the quota ends in September. And if nothing is done, there will be no more ethanol import quota, so any ethanol that comes into the country will be paying taxes, and this is being discussed with the government. And I would like to remind you that the United States charges taxes on imports from Brazil. So there is this discussion going on. So in September, September will be the deadline and there will be no more quota to import ethanol.

In terms of Renovabio, unfortunately, I don't have anything to inform you. Our units will be certified by the end of the year. Database, December, we will have an amount of C-value available for sale. And as of next year, there will be a supply of C-value to the market and buyers will buy, and there will be a supply. And we are sure that the 4 units of São Martinho will be certified. But I cannot tell you how much this will impact our P&L, '21 will probably not be very relevant because it will be the beginning, and we will have the year-end inventory as well. But as 2021, when the program is still -- is already working at full speed, then the situation will be different. But I wouldn't like to make any estimate right now.

And the last question about capital allocation. We announced the program of share buyback, BRL 10 million, and dividends will be paid out this week. And our position about that remains the same. We look at all the possibilities and such as the corn one, and we are detailing this in-house and we are submitting this. We'll be submitting this to approval by the end of the year. As soon as the Board approves, then we will be telling the market all the details related to this. It's a relevant project with a very good return. And the intention is to complement Boa Vista. If you look at the corn project all by itself, it is more difficult for it to really stand up. But together with Boa Vista, energy, et cetera, this is more feasible. There is a major chance for us to go ahead with this project and have the approval by the Board. But we are still doing all the details internally.

M&A, while this is a pillar and the company is always looking at the opportunities that appear in the market, and because of the nonrecovery of prices of sugar and ethanol, we, so far, are just starting the possibilities, but nothing more concrete in our radar screens, so we will not have something very relevant to inform you by the end of this year.

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Luiz Carvalho, UBS Investment Bank, Research Division - Director and Analyst [18]

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Could we go back to quotas? When the quotas come to an end in September, will there be an impact for São Martinho in terms of prices?

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [19]

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We don't understand what you said.

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Luiz Carvalho, UBS Investment Bank, Research Division - Director and Analyst [20]

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The impact of quotas, what could happen?

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [21]

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If you simply remove the quota, we believe that there will be no impact because there will be no import of ethanol from the United States. In case we have a change there and ethanol is 0% levied, in this scenario, very improbable. In our opinion, we would have a volume of ethanol imported from the U.S. that could hinder prices domestically. And the recovery of ethanol prices that we expect in the intercrop period could not materialize. But we do not believe this is probable. The probability is very small because the quota in the United States on sugar imports remain. So this dialogue with UNICA is exactly to see 2 sides. Because if you only do this on 1 side and you have ethanol from the west here coming into Brazil with no quota, this could bring pressure on the domestic prices, of course. Thank you.

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Operator [22]

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(Operator Instructions) Fernanda Cunha, Citibank.

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Fernanda Perez Da Cunha, Citigroup Inc, Research Division - Senior Associate [23]

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The 70% parity that you mentioned, are you considering the tariffs and the quota such as they are today? And what would be the parity in bull and bear case that -- and my second question, what about your discussions with the State of Goiás for the ethanol project? And the third question is about the maintenance CapEx. In the release, you said that the production costs should say they're in nominal terms. And could we consider the maintenance CapEx exactly in the same situation? Because you have a devaluation year-on-year in this sense.

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [24]

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Fernanda, our base scenario for price recovery in the intercrop period is that the quota would be maintained as it is today, up to 600 cubic meters per year being allowed. So we believe that parity could go back to 70% and the intercrop period, should this be maintained. Now if, for some reason, we had -- we didn't have this 20% tariff. Ethanol, on average, would be close to 64%, 63% parity. This is where it is today with no price recovery. But this is a situation that we do not consider as being probable.

About your second question, we do not have an update to give you, and we have -- we already have a protocol of intent between São Martinho and the state of Goiás. And when we have an update to give you, we will immediately do this. And we expect to be able to do this when we submit this to the Board.

Maintenance CapEx and cost, Fernanda, your last question, the cost of goods sold. If you look at the cash cost, we estimate it will be stable year-on-year net of Consecana. And when I say stable, I mean that within this cash cost, we already have the maintenance CapEx included. So what is happening is that the production cost goes up, the cost of fertilizers and labor, et cetera, then the maintenance CapEx goes up. I believe it's 5% to 6% in the guidance. But in spite of that, as we have an operating leverage because of the higher crushing, we can absorb so to save this cost increase, offsetting this with this better production and better yield. So in summary, the maintenance CapEx goes up, but you'll have an increase in yield as well. So because of that, you'll have a situation of stability if you compare crop year to crop year net of the effect of Consecana.

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Fernanda Perez Da Cunha, Citigroup Inc, Research Division - Senior Associate [25]

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You talked about the bear case, and what would be the bull case? How could we see this parity going up?

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [26]

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In the bull case, we would have less 300,000 cubic meters, which would be 2 quarters of quota. So this volume is not so relevant, and it will not be enough for prices to go up beyond 70% parity. The bull case has really to do with the price of oil. If it remains around $50, then you would have a price between 70%, 75% of parity. So this would be the case.

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Operator [27]

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Alexandre Falcao, HSBC.

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Alexandre Pfrimer Falcao, HSBC, Research Division - SVP [28]

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How do you see the hedge situation from now on, the volume of the '20/'21 harvest is quite low? And as the dollar is at the current levels, where do you believe this will have an impact on sugar prices to start to hedge more? Or do you believe you should wait longer to hedge?

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [29]

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Falcao, thank you for the question. Given the uncertainties that we have today because of the Brazilian harvest, most of the industry is not renewing the sugarcane field. They are in a delicate financial situation, and this has an impact. When you have an increase in crushing, well, an increase in crushing for the next crop, the possibility is low. Ethanol is remunerating more or better than sugar already. And I would start to increase prices, should the price of sugar get close to the average of the parity of ethanol for the next crop.

When you make an estimate of the average price of ethanol for the next crop year with an exchange rate of x, and with that, I have a parity of x or y, and in the equivalent price of sugar, we would be accelerating a little bit more of the hedgings. But the way things are today, we do not see a downside in terms of continuing with the policy that we have in place.

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Alexandre Pfrimer Falcao, HSBC, Research Division - SVP [30]

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Do you believe you can do a synthetic hedge of ethanol from now on?

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [31]

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A synthetic hedge? Well, that would be a possibility, but I cannot put this in hedge accounting for you because it's very difficult to see the correlation between ethanol prices and oil prices due to this dynamic of crop and intercrop period. You can do but there would be a degree of risk involved. And we would rather not do this yet based on prices of gasoline or oil. We are studying this, but so far, we have no news to impart to you.

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Alexandre Pfrimer Falcao, HSBC, Research Division - SVP [32]

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And I have another question. It seems that the process is not very complex. Can you tell us why the other groups are not doing this? Of course, those who do not have the capital would never do that. But I would like to know why the other groups are not doing more than this?

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [33]

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Well, there is an important point involved. If over 50% of your sugarcane field is a 12-month sugarcane because the planting of presprouted seedlings at Meiosis convert everything to 18 months in São Martinho. Before starting, the implementation of this technology had 70% of 18-month sugarcane as the remainder was 12 months. And when you convert and you take your 30% of 12-month sugarcane and you convert this into 18-month sugarcane, in the sugarcane cycle, the first year is you lose production because you plant from January to March, and you're only going to harvest on the next year. If I had half of my area before I started the project with 12-month cane, even using all the benefits, and if I look at the whole cycle, I would be losing crushing and not gaining crushing. The cost of planting would be lower, but I would be losing crushing mainly at the beginning. And when you lose crushing at present value, you have a negative P&L.

And what happens is that São Martinho already had 70% 18 months, so the change was only natural. And the reason why most of the groups that do have the necessary capital, the main reason why they're not doing this, it is for structural reasons because it is difficult to change because you end up losing cane. And the second reason, for those who have already, like, 70% 18 months, it takes time for you to do PSS with Meiosis. First, you have to invest in presprouted seedlings. And it is not just a matter of money, it has to do with time. You can do this. But until they get to the phase that we are today, it would take them about 5 years to catch up.

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Operator [34]

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Lucas Ferreira, JP Morgan.

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Lucas Ferreira, JP Morgan Chase & Co, Research Division - Analyst [35]

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We read a lot about China considering the possibility of going to 10% land. And to think that there is some technical difficulty involved, but there are new discussions going on, it seems that they will make new attempts. And I think Marcelo was in China, in one of these groups of businessmen. And do have an insight about that? Do you think this is feasible? And how could Brazil benefit from that?

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [36]

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Yes. Brazil could benefit from the (inaudible) trade that Marcelo participated in. Well, based on UNICA, they talked with the Chinese, and it seems that their proposal of going towards 10% is very strong and very serious proposal, and they have an importance.

On the inventory in China as it was converted to ethanol or they have a plan to do this. In the long run, if you look at the long run, the export of ethanol from Brazil to China could become a reality in the long haul. Nothing to happen in the next couple of years or 3 years, but the intention on the part of the Chinese government is very solid, very sound, and they should be carrying out this migration. In the 3 to 5 years, it could become an important market for Brazil. But not in the next couple of years. It would be more in the long haul, but it will happen. And converting this corn and ethanol also, Brazil could be a very major supplier of ethanol.

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Lucas Ferreira, JP Morgan Chase & Co, Research Division - Analyst [37]

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Are you going to have any disbursements in your CapEx regarding this corn project?

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [38]

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Well, most of that will be in the next crop year. If we have this, it will be like BRL 30 million in the last quarter of this year.

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Operator [39]

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The Q&A session is closed. We would like to ask Mr. Felipe Vicchiato to make his closing remarks.

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [40]

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Thank you for participating in our call, and we remain here at your disposal. Thank you very much. Have a good afternoon.

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Operator [41]

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São Martinho's conference call has come to an end. Thank you very much for participating. Good afternoon.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]