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Edited Transcript of SMTO3.SA earnings conference call or presentation 12-Nov-19 6:00pm GMT

Q2 2020 Sao Martinho SA Earnings Call

Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Sao Martinho SA earnings conference call or presentation Tuesday, November 12, 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

* Christian Audi

Santander Investment Securities Inc., Research Division - Head of Latin America Equity Research, Agribusiness & Oil, Gas and Petrochemicals

* Fernanda Perez Da Cunha

Citigroup Inc, Research Division - Senior Associate

* Leandro Fontanesi

Banco Bradesco BBI S.A., Research Division - Research Analyst

* Lucas Ferreira

JP Morgan Chase & Co, Research Division - Analyst

* Luiz Carvalho

UBS Investment Bank, Research Division - Director and Analyst

* Werner Roger;Trigono Capital;Founding Partner

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to São Martinho S.A. Second Quarter of the '19/'20 Crop Year Earnings Conference Call. Today with us, we have Mr. Felipe Vicchiato, CFO and Investor Relations Officer; and Mrs. Aline Reigada, São Martinho Investor Relations Manager.

The audio and the slides of this call are being simultaneously broadcast on the company's website, www.saomartinho.com.br/investorrelations. (Operator Instructions)

We would like to clarify that some information conveyed during this call may contain projections or forward-looking statements. As such, they are subject to known and unknown risks and uncertainties, which may lead such expectations not to materialize or be substantially different from those expressed in these forward-looking statements.

Now we would like to turn the floor over to Mr. Felipe Vicchiato, who will start today's call.

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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, everyone. Thank you very much for participating in our call about the second quarter of the '19/'20 crop year. I would like to start the presentation with details about our agenda on Page #3. First, the financial highlights, the performance of the crop year so far. Financial highlights indebtedness of the company for the period closing September, the hedge position and the volume of investments that we intend to do during this crop year, in line with investors in operating improvements and other projects that we have.

On Page #4, we have the performance of the crop up to the close of September. Crushed sugarcane, 18.9 million tons, 2.7% higher than the previous year. Our own, 3% up. Third-party sugarcane, 1.5%. Year-to-date improvement in the yield of the fields going from 75 to 85 tons per hectare, going up 13%, an important recovery as well.

And going back to São Martinho's based on what it delivered in terms of yield, and average TRS dropping by 3.8%. And last year, the base was too high because of the dry weather in the combination of higher yield. And the TRS, we have about 8% growth when you add the figures. The production of sugar up to the close of September was 6% higher than last year as it was a shorter crop. In a few weeks of the crop, we were able to reduce crushing because there was less sugarcane. And with this reduction, we were able at the time to do a little bit more of ethanol than sugar because the plant was not full. And as the plant became full, mainly in the last quarter, we ended up producing more sugar vis-à-vis last crop up to the close of the year, that will be in the first or second week of December. We will have probably more ethanol production, but sugar going up a little bit as well because I have a higher guidance for crushing than last year.

Now going to Page #5, which are the financial highlights of the quarter. Net revenue going up 19.7%, going from BRL 643 million to BRL 770 million. Adjusted EBITDA going up by 22%, BRL 387 million. Basically, this improvement is based on the improvement in the average prices for ethanol in the quarter vis-à-vis the same period last year and the higher volume exported of sugar on a quarter-on-quarter comparison, in spite of the average price being slightly lower than last year. In this quarter, we exported a major part of ethanol, 88,000 cubic meters, in the window in which there was more margin than in the domestic market. And when you exclude the effect of the commercial expenses in the price of the product quarter-on-quarter, the growth in the average price of ethanol would go from 1,634 to 11% more and not 14% more.

As you can see on Slide #5 on the ethanol side of this slide, we do not expect these exports to continue in the next couple of quarters, and the remaining volume of ethanol that we have will be to supply the domestic market, which is quite strong. And yesterday, there was data published about the consumption of hydrous in the market in the combination of the 2 over 6% hydrous going up 2 digits. So you can see the demand for ethanol going up in the local market, and the company is supplying the market with our own production in the next 2 quarters.

In cogeneration, 14% lower price than the previous year, basically because of the spot market prices that were almost half of the previous year's prices. Although we have a small volume of spot prices, we ended up suffering in the average price.

The adjusted EBITDA, continuing the highlight -- the financial highlights were 35% EBITDA margin. EBIT higher than 20%. Net income before the IFRS going from BRL 58 million to BRL 92 million, a 58% growth. IFRS during this quarter was BRL 30.8 million. And here, basically, the fact that São Martinho has a large volume of own sugar. When you bring this to present value, this has a negative impact on the results of the first quarter. And the trend for the next couple of quarters, the impact should be lower, and we are working with our auditors in order to deal with this theme. But once again, this has no cash effect. So this is not so important in terms of details in our financial statement. If you're curious and if you want to understand the calculation, we will be available to explain.

Cash income, BRL 64 million to BRL 116 million, 80% higher than last year. And besides the effect of the IFRS, we had about BRL 9 million effect coming from the mark-to-market of the asset in -- usually in the second and the third, you have a negative mark-to-market of the biological assets because the coverage is happening in the first quarter. It was a positive mark-to-market, BRL 9 million positive in biological assets year-to-date.

The MTM is 00. In the third quarter, it should be negative. In the fourth quarter, a positive figure. So for the full year, there will be a very small, almost 0 impact of the MTM of the biological assets.

Let's go to Page #6 and where we see our indebtedness in September. We had BRL 3.1 billion of net debt or 30% higher than March 31, 2019. And the cash of the company was BRL 1.4 billion. And the gross debt, BRL 4.5 billion, the growth in the net debt. Comparing March to September '19, it's directly related to the investment in working capital that we had in this period because of the inventory of sugar and ethanol that we currently have and something close to BRL 1.5 billion at market value. And the accounting value, of course, is lower, close to BRL 600 million. And besides this, we had an extension CapEx of BRL 100 million and the exchange rate variation in the period, the dollar going from BRL 3.90 to BRL 4.15. So we have part of our debt, 34% in dollars. So this has an impact on the company's indebtedness. The debt schedule, 1 to 4 years, BRL 1.4 billion in cash. Basically, 2, 3 years of the debt being paid. And recently, we announced an upgrade in our rating. São Martinho is 1 of the 10 Brazilian companies with investment grade, and we are very proud -- São Martinho is very proud to have this investment grade with only a handful of other Brazilian companies. And this is evidence of our resilience, even in cycles of low prices for sugar and ethanol and the debt profile, which is very adequate, with no liquidity problem whatsoever.

On the next slide, on Page #7, we have our hedge position closed in September for the '19, '20 and 2021 crop year. We already had part of the sugar realized. 87% of the volume -- or the remaining volume of our own sugarcane was already locked in at BRL 1,818, a combination of 3.54 sugar and dollar higher than BRL 4 for the 2021 harvest. In September, we had close to 200,000 of sugar hedged at BRL 1,246 with the price at 3.6 and the price of sugar in the dollar at BRL 4.15. From September up to today, we have already evolved in these hedges. The market gave us some opportunities in the last few weeks, and we are growing -- we will be growing at least an additional 100,000 tons with an average price, which is very similar to the ones that we have close to BRL 1,250 per ton. We do not -- well, the reason why so much have accelerated hedging, and this means something about 40% to 50% of our exposure for the next year, and it depends on the sugar mix. And the reason for that is that we do not believe that the sugar price has a lot of room to grow very quickly, mainly in the screens of May '20. So we accelerated our hedges if the Center-South in the 2021 harvest continues to produce with a mix more towards ethanol, such as we have in the past harvest. We understand that by the end of the next harvest, the sugar prices could recover. And of course, it will depend on the production of sugar in the northern hemisphere. But so far, we have decided to hedge almost 40 -- 30%, 40% of our own sugar. When you look at our total TRS exposure considering the ethanol TRS, it means 15% to 20% only.

Now let's go to Page #8 in order to end my presentation and then open for questions. We announced recently an investment of BRL 320 million of cogeneration in the São Martinho plant. It's a 25-year contract that we won in the A-6 auction, a 177-gigawatt hour at BRL 206 per megawatt hour adjusted by the IPCA or the inflation rate. And it will start in January 2025, and the plant should be started in 2023. The investment should happen in the next 2 harvests and with a return -- or a 2-digit return. So we're quite happy because we won this auction, and this is an important investment for São Martinho because this is the main plant of the company. And today, the boilers -- our low-pressure boilers -- and with this investment, we opened the option for São Martinho from the crushing viewpoint of up to 12 million tons in the future. So this was a bottleneck, this issue of steam. And of course, we have other bottlenecks, which is the availability of sugar field and distillery and crushing mills. But this problem with this investment, we are able to solve it. And by itself, it really pay for itself, so to say. So we are very happy for our success in the harvest.

This was the third or the fourth quarter auction we participated. In the first one, we were not successful because the price did not give us the necessary return. And now we were able to win, and investments will be happening and in a couple of years or 3 years, we will have the plant running. For the '19/'20 harvest, we estimate a maintenance CapEx of about BRL 1.1 billion, and the maintenance CapEx encompasses the treatment -- crop treatment, planting, the maintenance of the intercrop period. And during this harvest, we saw an increase in the cost of fertilizers and crop protection products because of the dollar, and these 2 mean BRL 250 million in our total cost for operations. And basically, this cost, it has to do with the crop treatment and planting that are under our CapEx. And this is one of the reasons why our maintenance CapEx is higher than we estimated. Beside the maintenance CapEx, we estimate something close to BRL 180 million in project CapEx, with BRL 70 million in operational improvement, with the exchange of trucks and harvesters and with a better yield than they pay for themselves over time.

And in projects, we have investments in order to remove a bottleneck, mainly the production of ethanol, the process of yeast, or production of yeast in one of our units could double the volume of yeast produced by the company. And today, yeast represents something close to BRL 20 million, BRL 22 million in terms of revenues with a very interesting margin. And we will be doubling this volume of yeast for the next couple of years in the project with a very rapid payback. And we conclude this year, all the initial investments necessary for 82% and -- for Meiosis. And as of the next crop year, Santa Cruz will be running as of next year.

These were my initial remarks. And now I would like to open for questions. Thank you very much.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Fernanda Cunha, Citibank.

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Fernanda Perez Da Cunha, Citigroup Inc, Research Division - Senior Associate [2]

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Could you give us some idea of the ROIC for the new project that you ended in October? And what about the sales of ethanol during the third quarter? What is the performance of sales? And we saw at least in the last few days, the prices for cubic meters. So how do you see the sales over this quarter? Is this something gradual? Or do you expect something different for the end of the quarter or maybe the beginning of the next one? Do you expect a change?

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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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The IRR of the project is close to 12% a year. In relation to sales, we would rather not give you any guidance for sales for the next quarter. It's a strategy on the part of the company not to talk about what the production of ethanol will be. And leaving our commercial department more, let's say, with a higher degree of freedom. And the average price of ethanol is lower than parity. Today, when you look at a consumer viewpoint, it is still advantageous to consume ethanol vis-à-vis gasoline, 66%, 67%. So there is still room for ethanol to adjust price up. And besides consumption being very strong, on the other hand, the inventories of ethanol today are 5% higher than they were in the same period last year. So in spite of the strong consumption, and we believe this will continue, we do not expect ethanol prices to continue to go up in the next few months and neither in the intercrop period. In January, for instance, last year, it dropped 20%; in February, going up 30%; and then an additional 20% in March. We do not expect a degree of volatility now and we do not expect, on the other hand, the price of ethanol going up very steeply. The Center-South is producing a lot of ethanol in spite of the fact that the harvest has already ended. So we have more than enough to supply the market. So the scenario is good, but the prices we do not expect prices to go up very steeply. Thank you.

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Operator [4]

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Lucas Ferreira from JPMorgan.

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Lucas Ferreira, JP Morgan Chase & Co, Research Division - Analyst [5]

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Felipe, about the corn ethanol, do have any update to give us? And when will it be submitted for approval? Do you have any additional details?

And the second question is still about ethanol. How do you see the fundamentals for ethanol for the next few years, I would say? Are you constructive in terms of demand growth? Do you believe supply will be able to go hand-in-hand with demand? And of course, it will -- the price scenario will depend on oil prices and the exchange rate, et cetera. We know that. But do you think ethanol has already changed level? How do you see the profitability of ethanol vis-à-vis sugar for the next few years?

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [6]

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Lucas, thank you for the question. We are constructive vis-à-vis the ethanol market for the future. The Renovabio coming on board next year helps us to absorb or to buffer the impact of the variation of oil prices and the exchange rate once the distributor will have to buy cheap bio. And ultimately, it will be a component of the ethanol price. So we are bullish about this. We believe that -- believe consumers have changed level because when they consume ethanol, it's not only a decision based on price because it is also based on the habit on the part of the consumer to -- then with ethanol and no fear, such as the one that they had in the past in terms of some problem in the car motor, and it is a commodity. And of course, it depends -- or the price of ethanol will depend on the oil price and the price of sugar, but there is Renovabio that will help us in this matter. So we are bullish about it.

From the supply viewpoint, 0 supply of ethanol in the short run, sugarcane ethanol, okay? And if there is any supply, it will be by means of removing some bottleneck at the plant and reducing the production of sugar and going more towards ethanol. And then you have to see case-by-case in terms of the units in order to see the characteristics of each one in terms of bottlenecks. In the case of São Martinho, the only bottleneck that we are able to remove is by making a small investment in the São Martinho mills next year. We are not going to do this now. It will have to be next crop year, and we will be able to remove 50,000 to 60,000 cubic meters of ethanol more to the detriment of sugar. So you have to look case-by-case, each plant has different characteristics, and you have to see which ones are able to remove ethanol -- remove bottlenecks. So we do not see a lot of supply of ethanol, but -- sugarcane ethanol, but from corn, yes, because many projects have been announced. I don't know whether all the projects will materialize and whether they will be feasible. But considering what has been announced, we are talking about a major volume of corn ethanol to supply the demand that should be coming in the next few years.

Regarding our own corn ethanol project, we had the expectation of submitting this to our Board by the end of this year in December, and this will be done in the first quarter of next year and no longer in December. There are some discussions going on in the State of Goiás about the change in tax regulation and on ethanol and fuels, and it -- the taxes from the producer to the distributor. And we're following this very closely, and we have to see the impact of this change vis-à-vis the demand for fuel in this region. And this is the reason why we are waiting to then make a decision whether we are going to go ahead with the project and submit it in the first quarter of next year. The probability of having this approved is still quite big. But there is this debate going on, and we are following very closely because we will only submit this to our Board when things become more clear, that is to say, taxes in the state of Goiás.

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Operator [7]

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(Operator Instructions) Leandro Fontanesi, Bradesco.

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Leandro Fontanesi, Banco Bradesco BBI S.A., Research Division - Research Analyst [8]

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I have one question about Renovabio, or Renovabio. We know that it is evolving. The project already has about 200 mills that are under certification. And which of the São Martinho plants are being certified? And what is the status? And what do you believe will be the conversion of liter of ethanol to a CBIO? And any other information that you can give us about the Renovabio and the potential benefits for the company?

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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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Leandro, thank you for the question. Our 4 mills will be certified by the end of this current year. One of them is already certified. And the other 2, we expect in the next week to have some news about it. In relation to the amount of CBIOs per liter of ethanol, our initial estimate is that we will be able to -- for each 750 liters of ethanol, we get 1 CBIO in the ballpark figure. And initially, we saw the average of the other companies. And with any yield, 5% to 10% better than the average of the other certified companies or plants. But this depends on each one individually.

One thing that is very interesting, the plant, that for some reason or another this year, has a financial problem and is using less input or less fertilizers. And when you put this in the system in order to certify ethanol, probably the certification will be better than São Martinho because they are not investing in input because they are facing financial difficulties but, initially, our unit must be more efficient than the others. If you take one of our indicators, which is the indicator of efficiency, of our machines and harvesters, in one harvester -- one harvesting machine, we can have 1,200 tons per day. So you spend much less diesel in the operation, and diesel is an important input for you to calculate CBIO. This 5% to 10% is an initial estimate. It's a ballpark figure. But when we have all the plants investing, we believe that this gap could be even bigger in favor of São Martinho. But initially, we are talking about 750 to 1 CBIO.

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Operator [10]

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Luiz Carvalho from UBS.

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Luiz Carvalho, UBS Investment Bank, Research Division - Director and Analyst [11]

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I have 2 questions more along these lines. Not specifically about São Martinho, but how do you see the program, the Renovabio program, itself from the timing viewpoint and stumbling blocks? And in the initial process, there were some gaps, so to say, in terms of information. And could you talk about the corn ethanol plant and the decision-making process and how you or why you started to discuss this? And how do you see this now based on the most recent update in the negotiations?

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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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Thank you for the question. I understand that the Renovabio point, some plants or distributors could have some reticencies initially as you said yourself, some gaps in information.

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Luiz Carvalho, UBS Investment Bank, Research Division - Director and Analyst [13]

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Are you going to certify all the sugarcane from your suppliers as well? And I believe that in the beginning there could be some delay or -- I don't believe that the program will start up and running on January.

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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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I really don't think this is the case. But what we see today is that the volume of companies that are seeking certification is quite relevant already. And if they are certified, there will be a volume -- a relevant volume of CBIO available for sale in the market. So we are bullish about it. We believe that the program will happen. And whether it takes an additional few months or 6 months or 1 year, really it's not going to hinder the program as a whole if you look in the long run.

In relation to the corn ethanol plant in Goiás, as I said answering the previous question, we are paying attention to the changes that are being proposed in Goiás in terms of taxes being charged on ethanol. And we are assessing this. And once the change reoccurs, then we are going to evaluate the projects and submit to the Board because I cannot bring it to the Board of São Martinho with very big project without having 100% certainty about the taxes. In the whole chain of ethanol, this does not change anything structurally, but we see some things going on and we have to wait for these adjustments to be conclusive by the government or not, and we have to have predictability. Once we have that, we are going to submit this to the Board. And this is the reason why it was postponed to the first quarter. And the project is very good because of corn mill, coupled to a sugarcane mill, makes the project very profitable because you do not have to -- there are many benefits regarding the boiler.

And in the case of São Martinho, the energy that I will be using is an energy that I'm selling in the spot market. So the economic fundamentals are good. However, we have to wait for these decisions to be made by the state government of Goiás. And then we are going to assess this and then submit it to the Board. So this is the reason why we had to postpone this to the first quarter. And when we make investments in São Martinho, we try to have as much predictability and security as we can. So with the sizable change, we cannot submit this to the Board without knowing exactly what has been decided. So we have been in the market for many decades, and we have to be sure that the project will be profitable. Without this, we are not going to go ahead. So this is the reason why it was postponed from December to next quarter.

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Luiz Carvalho, UBS Investment Bank, Research Division - Director and Analyst [15]

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One last question, if I may. Do you have any update regarding the legal procedure?

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [16]

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No. No update. It continues on the same stage.

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Operator [17]

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Werner Roger, Trigono Capital.

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Werner Roger;Trigono Capital;Founding Partner, [18]

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Congratulations for your results in such an environment. I would like to know if your Board already has some definition regarding the use of these funds that -- are these funds earmarked for some acquisition? I don't know whether an additional deleverage will be good for you or dividend payout maybe. Are you talking about the use of these funds for dividends? And regarding Iracema cogeneration, well, this is quite an old plant. Do you intend to modernize it for cogeneration? What can you tell us about Iracema?

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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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Thank you for the question. I would like to start with the last one, Iracema. When we announced the transaction with the acquisition of Furlan sugarcane, we made an investment in Iracema in order to increase crushing from 3 million to 3.5 million. And we made some adjustments in the industrial plan. So it does cogenerate. It does not have a high-pressure boiler. It has some cogeneration already. But today, we do not have a relevant project for cogeneration in Iracema or even growing the plant above 3.5 million tons because of the availability of sugarcane in the region. This is a region where there is a lot of competition for sugarcane, and this is a very big difficulty. And even completing this 3.5 million, we are crushing 3.1 million now. And going up to 3.5 million, it's rather difficult. So there is no project for cogeneration at Iracema. If the prices of cogeneration go up in the next few auctions, the second project that we could participate in would be in São Martinho itself because we have 2 phases to do the retrofit. The first one is the one that we have already announced. And there is a second phase that we could also carry out, but it depends more on better prices because the volume in cogeneration is lower than the one that we announced recently. But Iracema will remain in the size it is already, it is very well located for the consumer market. And we produce some sugar for the domestic market by means of Iracema. This is a very flexible plan because it has 70% at all mix and it's very close to Paulinia. So we are able to get a premium on our ethanol, which is by Iracema, but we do not expect to increase or expand the plant or invest in Iracema right now.

And your first question has to do with the precatório or credit notes we order. We have not received the second installment. We expect, up to the end of the fiscal year, we will be receiving this. And we have nothing to say about how these funds will be used. And I do agree with you that the level of debt of the company is already very healthy. So we do not need to further deleverage. And we are debating this with the Board of the company. And up to the end of the fiscal year, we should have some definition regarding what to do with these funds.

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Werner Roger;Trigono Capital;Founding Partner, [20]

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Regarding corn ethanol, is Goiás the only possibility? Or do you have any other locations where you could do that? Or this is the only alternative, that is to say, Goiás state.

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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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Well, we could do this in the São Martinho unit. But first, we have to do this in Goiás and then we test the project. If we are able to approve this in Goiás and if it really works, we will do this first in Goiás, and then the second option would be São Martinho -- in the São Martinho unit. But the economics are a little bit tighter, so to say, because the cost of corn freight, that is to say, to bring it to -- from Rio Verde in Goiás to bring to São Paulo is still too high and the DDGS, which is the subproduct, the main market is in Goiás and Mato Grosso. So the byproduct -- the market is not in São Paulo, or we would have to produce it in São Martinho. The corn would be more expensive, and the byproduct would have to return to Goiás and Mato Grosso. So the logistics involved end up preventing this project from occurring. But I don't know, maybe in some years' time and if the logistics of Brazil improve and if costs go down, this would be a possibility, mainly now when São Martinho became more efficient in terms of steam because of the boiler situation and energy as well. And -- but today, the main bottleneck has to do with the logistics to bring the raw material here and then to send the byproduct to Goiás.

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Operator [22]

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Alexandre Falcao from HSBC.

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Alexandre Pfrimer Falcao, HSBC, Research Division - SVP [23]

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Do you have any position regarding Petrobrás in terms of refining, logistics or vis-à-vis the auction that will happen next year? Does this change the way you operate? Does it change your strategy? Would you need an additional trading arm or -- and how does [Cooper] see this?

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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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The fact that Petrobrás sells some -- is selling some refineries from the market viewpoint, it has to do with -- well, price manipulation, so to say, would decrease, and there would be more competition in terms of fuel at the end of the day. And I think this has a positive impact on us, but it doesn't really change our strategy for ethanol and neither is it going to incentivize us to get into this chain and maybe make a joint venture to sell fuel. This is not our play. We are -- this is not our game. We are producers of ethanol and sugar, and we intend to have a relevant logistics -- a good logistics. So for that, you have to sell on a timely basis, and -- but we have to wait and see what Petrobrás does and whether this is going to impact the market. But on our side, it's not really important.

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Alexandre Pfrimer Falcao, HSBC, Research Division - SVP [25]

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Do you believe that the weather of this harvest could have an impact on the next one for the remainder of this sector, maybe or not for you? Or do you think this is not going to be relevant?

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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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Well, this shouldn't be relevant because we had a lot of rainfall during this harvest in many different windows of the harvest period. And even if you have a noninvestment in the sugarcane field, next year, it should be more or less equivalent in terms of volume, in terms of tons. So I don't see this as a problem because what happens is that the weather, at the end of the day, helps the field for the next or the following harvest.

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Operator [27]

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Christian Audi from Santander.

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Christian Audi, Santander Investment Securities Inc., Research Division - Head of Latin America Equity Research, Agribusiness & Oil, Gas and Petrochemicals [28]

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I had 2 questions. Going back to the use of capital, Felipe, what level of leverage brings you comfort? You already have a low level, but what would be the range in which you would be comfortable? And how are you seeing the market in terms of M&As? And finally, dividend policy and potential growth CapEx for next year. And the second question. Well, you make it very clear -- you made it very clear, your view about sugar prices. And geographically speaking, how do you see on the supply side globally, whether you believe it could go up or down?

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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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Christian, in terms of sugar, what is going on is that, for the next year, there should be a deficit of sugar in the market. But on the other hand, the inventories are still high, mainly in the northern hemisphere where you have the biggest consumer market. We understand that this is a limiting factor to see a price recovery. India, the last figure I saw about India is that the expectation is that India could be reducing sugar production, getting to 28 million tons on average, according to analysts, but this reduction will not be relevant enough for a recovery of the sugar prices because the inventories are very high. But if Brazil has another harvest more towards ethanol for next year, then we would be producing 10 million tons less than the potential for sugar because in our mind, this would bring or start balancing the inventory volumes of sugar in the world. May and July screens, 2020, we do not see an upside. But maybe for October, et cetera, there might be a recovery because of this dynamic.

Your first question was about our level of indebtedness. We understand the ideal level of indebtedness is something close to 1.5x net debt to EBITDA. I would like to remind you that EBITDA is not in metrics in the sector of sugar and alcohol that measures the operating cash generation because you have a CapEx volume that is quite relevant, such as OpEx, the treatment and the planting, et cetera. So 1.5x EBITDA is something comfortable for us. If you look at the EBIT and cash generation viewpoint, the figure would be close to 3x more or less, depending on the recurring CapEx.

And you asked about dividends. And as I said in the last answer, we are having this internally. And by the end of the fiscal year, we should have some news about our dividend policy and how São Martinho will deal with surplus cash. Mainly after we receive the precatórios or the credit notes, the investment that I have in my pipeline are not so relevant, given the size of our cash generation. And I'm going to use 30% of our own capital, for instance. As we approve the corn ethanol by the beginning of next year, we will be using our financial drive so that we have a better IRR. And in the case of cogeneration, this is quite relevant because if I don't have the financial leverage, so to say, my IRR would be a very, very long-term project and with a very small margin. And the difference of sugarcane -- we are talking differently from sugarcane. We're talking about revenue that has to do with inflation. So there is not a very big risk. But you cannot run the risk of impacting negatively the IRR of the whole project.

I forgot about the M&A. Regarding M&A for this sector, I would say 0. I see no possibility whatsoever of anything happening in the field of M&As for the short run for São Martinho acquire any company in this sector. Our plants have a very good yield. And with Meiosis, we expect our yield to increase, and so this means that I don't need these biological assets to complete my industrial capacity. And buying a sugarcane mill from scratch and everything from the fields to -- the capital necessary for this is too relevant, and we do not see any room for this to happen. Even with a better ethanol price, the return would still be too low. So we do not see any possibility of this happening in the short and medium run.

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Operator [30]

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Lucas Ferreira, JPMorgan.

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Lucas Ferreira, JP Morgan Chase & Co, Research Division - Analyst [31]

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Felipe, what about the opportunities for liability management with your investment grade? Does it change the equation for you? Are you able to access some pockets of lower cost?

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [32]

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From the viewpoint of the local market, São Martinho has the investment grade for about 18 months, and we are -- yes, 1.5 years. And with this AAA rating, we access the CRA market at a very competitive price, the Agribusiness Receivable Certificates. In the local capital market, we do not see the price going down very steeply for São Martinho, maybe some local operation with a longer maturity at some point in time and the local market now is under stress, I would say. And recently, all the incentivized operations have opened the interest rates. But next year, we believe that we will be able to access again and with a better term. But the international market, investment grade can help a lot because then you can access another pocket with a longer maturity and with lower interest rates. We understand that the local market now, domestic market, even with the change in the interest rates occurred recently. It is more attractive than international markets. We have a very low interest rate now in Brazil.

And in spite of the sugar prices being in dollars, we understand that in the short and the medium run, the prices of sugar have to do more in reals, this combination of dollars and reals than dollar alone. And this is why we do not intend to increase our indebtedness in foreign currency in the next few years. 30% of our gross debt in foreign currency is enough, and our debt in foreign currency has been rolled over 4 years, the average term -- average maturity. So the first one will be in a couple of years, if I'm not mistaken. So we do not intend to make any international issuances right now. Thank you.

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Operator [33]

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The Q&A session has come to an end, and we would like to give the floor back to Mr. Felipe Vicchiato for his closing remarks.

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Felipe Vicchiato, São Martinho S.A. - CFO, Investor Relation Officer & Member of Board of Executive Officers [34]

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One second, there is a question that came to us via e-mail, and I would like to answer it before we close. Just a moment, please. It has to do with the production cost of the company.

We expect to close the fiscal year with a cash cost. And here, when compressed, the maintenance CapEx and the cash cost would be very similar to the one that we had in the last harvest, net of the effect of Consecana. The higher operating leverage will allow us to dilute the cost increase that we had in terms of crop protection maturity. So year-on-year, net of the Consecana effect, it should be more or less the same. Just to try to answer your question -- the question asked by one investor. So we maintain the guidance that we gave you in the last quarter. So we maintain it as the harvest will be ending by the beginning of December.

So thank you all very much for participating in our call. And we will remain at your disposal if you have any additional doubts. Thank you very much.

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Operator [35]

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São Martinho's conference call has come to an end. Thank you for participating, and we wish you a good afternoon.

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