Good afternoon, ladies and gentlemen, and thank you for waiting. Welcome to São Martinho S.A. conference call to discuss the results of the second quarter of the 2022/2023 harvest. Today with us, we have Mr. Felipe Vicchiato, CFO and Investor Relations Officer, and Mr. Alessandro Freitas Soares, New Business and Investor Relations Manager of São Martinho. The audio and the slides of this call are being broadcast simultaneously at the company's website, www.saomartinho.com.br/ir. We would like to inform you that all participants will be in listen-only mode during the company presentation. Later, there will be a Q&A session when further instructions will be given for investors and analysts only. Should you need assistance during the call, please press star zero to reach the operator. We would like to inform you that some remarks made during this call may be projections or forward-looking statements.
As such, they are subject to known and unknown risks and uncertainties, which may lead these such expectations not to materialize or be substantially different from those expressed in these remarks. Now, I would like to turn the floor over to Mr. Felipe Vicchiato, who will start today's presentation.
Good afternoon, everybody. Thank you for participating in our call about the second quarter of the 2022/2023 harvest. On page number three, we have our agenda. We will be talking first about the financial highlight then cash cost and our forecast up to the end of the year. The company's indebtedness, the price evolution for ethanol and sugar, guidance for the harvest that we published yesterday, and there was a revision, as well as the CapEx guidance. We have a summary here on the next page.
In the quarter, the company had an 11.2% increase in net revenue. Our EBITDA was in line with last quarter. It was very strong in terms of results. Adjusted EBITDA dropped 10% because of the cost increase. Agricultural products, mainly fertilizers, et cetera. Our EBIT margin dropped 6.3 percentage points, going to 26%. Net income dropping 42%, being BRL 212. Cash income going to BRL 318. We sold less TRS, minus 3.8%. Here we have a summary per product where you have ethanol in this quarter, 90,000 cubic meters of ethanol. Close to BRL 3.8 per cubic meter, which helped this going up 4% quarter-over-quarter.
The hydrous ethanol in the domestic market dropped a lot in line with the prices of gasoline that dropped, and ethanol followed suit. The exports offset the drop in the domestic market. For the next two quarters, we have about 100,000 cubic meters that will be exported, and that will partially offset the drop in prices of ethanol in the domestic market. Here on the next page, we have our cash cost. In the comparison of the half year up to September, 32% increase our cash cost in sugar ethanol, 30% basically because of the increase in the cost of diesel, about 54% in the period, fertilizer, 42%.
Our estimate is that the cash cost for ethanol will be close to what it was during the year, the year to date, BRL 2.6 and BRL 1.8 for sugar per ton. The cash cost goes up more than ethanol because of the freight expenses and the expenses to place sugar at the port. These expenses are higher than last year. Here you have the pie chart with a breakdown of the cash cost. Cane 37%, labor 18%. There was 12% negotiation, labor negotiation. SENA, 9, and diesel, 8, and the others I have already referred to. Now we have the company's indebtedness on the next page. We closed with BRL 4.2 billion net debt. Net debt EBITDA 1.57. We had a variation of 45% because of working capital.
Here, 1.8, as there was an increase in the SCOT, the cost of cane when you form the cost of the product. Over the BRL 45 million in investment, expansion and improvement CapEx, cogeneration and the corn plant and other investments. The corn stock, we already have our warehouses full of corn in order to start the next harvest in January with the plant in full operation. We have already acquired this corn, about 60% of the harvest, more or less. Dividends paid in the period. We closed the year with 4.2, as you can see on the last column. We have a very long debt, 5.4 years on average. Only 20% of our debt is short-term, and the remainder is long-term. In our indebtedness, 92% is CDI-pegged. Let's see the hedge evolution of the company.
Six months, our average price of sugar was close to $2,000. Own cane and Consecana, given the history of hedge that we have, the hedge of our own cane was something close to 10% lower than the Consecana. We expect that for the next half year, we may go to a price close to the Consecana, which is close to $2.3. For the next one, we have already hedged. To date, we hedged 70,000 tons, which gives about 40% of our own sugarcane for next year. Supposing we crush the same amount of sugarcane that we are crushing this year, and this should go up. For calculation purposes, supposing the same percentage, it would be about 40% sugar on the screen. The price is 14% higher than Hybrids.
If this premium remains, we should have a more sugar harvest from today until April. We have a lot of time still to make this decision about that. On the last two slides, just to finalize the presentation. With what I have described regarding production, we have updated our guidance. The 1.4% dropping in crushing 20 million tons of sugarcane. This is due to a combination of the own sugarcane and also in third party. This is the reason why we will be crushing less. TRS dropping 2.7% vis-à-vis the guidance. Because of the rainfall, and that was concentrated in September, we had a very fast deterioration in the curve of the TRS. Ultimately, for the update, we will be having this drop. Ultimately, we see 2.7% less product vis-à-vis our guidance.
We should be closing a production of sugar of about 1.2 million tons. On average, maximum sugar, maximum ethanol, and 900,000 ethanol. In ethanol, more or less 55% of the volume is hydrous, and the remainder is hydrous, mainly in the Boa Vista unit. Lastly, looking at the last slide, we have reviewed our CapEx estimate. The increase was mainly in the modernization and expansion because of the project. The first one is an irrigation project that will be irrigating about 20,000 hectares of sugarcane in São Martinho New Plant of our own land. We will have a very quick return in this project. This irrigation is very important because this is the reason why the CapEx is low and the return is high, because it's our own land, and we also approved another project for hydrous ethanol production in São Paulo.
As of the next harvest, the company decided to have a more sugar mix. If we do that, we will have 100% in hydrous, and only Goiás will be making hydrous. Basically, it will be around 1.2 billion liters next year, and we will be starting the ethanol plant next year. Only 450,000 will be hydrous corn ethanol for the domestic market. This reduced the volatility of prices in the domestic market. We do have this room for this decision if we have the situation that we had this year. These were my initial remarks, and now I would like to open for questions.
We will have a Q&A session now for investors and analysts. In order to ask a question, please press star one. Guilherme Palhares, Bank of America.
Good morning, Felipe, and other members of the Investor Relations team. We have two questions here. The company increased exports, having about 40% of the volume. Looking at the next few quarters, will you be keeping this level of exports? A second question in relation to the CapEx. We saw the additional CapEx that you mentioned, and I would like to understand when we look at the execution of the CapEx. Do you have a timeline in terms of the disbursements that will be necessary for these projects?
Guilherme, good afternoon. Thank you for the question. In relation to the ethanol exports. Year to date, 173,000 cubic meters of ethanol between anhydrous and hydrous ethanol. Our estimate is that we will be totaling an additional 95,000, which would be around 250,000 cubic meters of ethanol.
Proportionally speaking, we will have the 900,000 that I will be producing and something close to 27%-28% in exports. Exports this year occurred because of a window that we had, and we have a lot of our own sugarcane with good volume of certification, so we can guarantee an additional 249,500 for the next few quarters. For the next two years, this will depend on the market. It's very difficult to make any kind of forecast right now. In the previous years, this didn't happen. It was lower. Ethanol is increasing because of some restrictions for the production of ethanol in Europe. We are prepared to take advantage of this window of opportunity. In the domestic market, consumption dropped quite steeply, the same as the price of gasoline, because consumers went more towards gasoline than ethanol.
This was where we had this window for exports. It's very difficult to forecast what will be happening. Only in the next semester, in the next half year, we will be able to do that. In relation to the CapEx, the timeline is that we should be doing this up to March. The plant will be ready by March, so that we may operate it and start production and irrigation as well. It happens right in the middle of the harvest, so we have to have the investment ready and made so that we may irrigate in the middle of the harvest. Corn and the plant will be ready, so this will be spent up to April.
Just a follow-up question. In irrigation, are you going to buy the equipment?
We will be using our own vinhaça channels.
This vinhaça channel is already in place, and this is where we will be putting the water for irrigation. The irrigation that will be done will not be the drop-by-drop irrigation.
Daniel Sasson, Itaú BBA. Good afternoon, everybody. Thank you for the questions. About taxes on fuels in the domestic market, what about your frame of mind regarding PLP 18? What do you believe will happen at the beginning of next year with the change in the federal government? Do you have any expectations regarding a timeline, for instance? It would be very interesting to learn what you are thinking about that. My second question has to do with the corn ethanol plant. Could you give us some color about the development of the project? Let's say there is an additional drop in prices in the domestic market.
Let's say the fuel price policy is not pegged to the international prices. What will be your expectations regarding the profitability and the IRR for this project?
Daniel, thank you for the question. I will start by the second one. We are starting to commission the corn ethanol plant right now in November. It will be fully operational in January. In relation to the profitability coming from this plant, this plant has a combination of anhydrous ethanol. A very low energy consumption, only 60,000 megawatt-hours, and with the volume of production of oil, which is very high. The DDGS is around 1,500 per ton, and that would be 150. So when you place this as a cost reduction factor in order to check the cash costs of the plant, the plant has about 70 BRL cash cost. Which is very low.
It is one of the lowest cash costs of ethanol that I have. With that, we have a very big buffer regarding the decision to operate the plant should the prices go down. We believe that the ethanol price around BRL 2.6-BRL 2.8. It has a return of about 15% per year. I don't think prices will go down much further than this. It would be very difficult to stop the plant because of prices. In relation, going back to your first question, it is very difficult to do any guesswork about taxes for next year. There is a debate going on at Congress about the budget, and it's a very complex debate. We have to wait and see what the decision will be on the part of the government.
The good news is that President Lula has always defended ethanol since his first term of office. He understands the importance of ethanol for Brazil and for the world. Let's give one step back and wait, because this is not under our control. The only thing that we can control is our company, our operation, our costs. Prices, well, you have the market giving the cards. We are studying an additional flexibilization. Maybe producing a little bit more sugar for the 2025. Anyway, I would rather not say anything about that because we have to wait for the decision made by the government.
Thank you.
Leonardo Alencar, XP. Good afternoon, Felipe, everybody. Thank you for the question. I would like to make a follow-up about the ethanol and the CapEx.
You're talking about the production of anhydrous and the exports. What about exports? Do you have anything scheduled or programmed for storage at the ports, for instance? Will you be having more volume from third parties? And something I would like to understand a little bit better, the CapEx that you have in irrigation that you were talking about. What is the expectation of improvement in productivity with this irrigation? And will you be investing more in other regions as well after this one?
Leonardo, thank you for the question. I would like to start by the second one. Our estimate is that with irrigation, we will have 10-15,000 tons more in this area because it is inversely proportional to the amount of rainfall in the year. A year like this one, a very dry one. Let's say I had the operation of irrigation already, I would have more.
In a normal year, it would be from 10-15. This irrigation plan is only for Usina São Martinho, the São Martinho plant, and we intend to expand it to Santa Cruz and Boa Vista. The CapEx would be higher because this technology that we are using now, the use of irrigation through the finance infrastructure that we have, would be more expensive in the other areas. Depending on the results, we will be able to do this in the next few plants. Let's wait for the weather conditions to go back to normal. Let's wait for us to have good rainfall. October was according to the average or within the average. If we have enough rainfall, we are not going to need irrigation.
Irrigation is only necessary when you have an abnormal condition, such as we had in relation to the exports of ethanol. In fact, the investment in anhydrous that will be made will lead us to produce more in São Martinho. Maybe in the intercrop period, maybe we will be able to transform more hydrous into anhydrous. Because there would be a real option to do a dehydration during the intercrop year, producing more anhydrous. This year, we didn't have to invest anything in terms of storage. We organized our logistics to deliver ethanol for export, and we planned to go straight to the port, and there was no additional expenses regarding storage.
Thank you.
Gabriel Barra, Citibank. Thank you for the question, Felipe. Two questions. When you look at the yield, you have revised the guidance for production.
Could you help us think about the next few years? How do you see this productivity in this harvest vis-à-vis the CapEx? Also, you have an increase in CapEx to correct potential products or problem products to increase productivity. The second, the company, has a very low indebtedness, very low leverage, and with an uncertain scenario for the sugar situation and also for ethanol because of taxes and pricing policy. How are you thinking about investment and capital allocation for the next year? Also a very fast follow-up about your exports. What about the export premiums? You have more focus on anhydrous to depend less on the domestic market. Maybe you could talk about this premium for the export market, so that we may think about the next harvest vis-à-vis ethanol prices.
Gabriel, thank you for the question. The first question about yield.
For the next harvest, there is no additional CapEx that has to be made in order to increase yield. Usually, CapEx is in the previous harvest during the crop treatment and irrigation in this case, and we have already done it now, so this is the reason why our CapEx was high. We have to correct the soil and many other things. For the next year, this is not going to happen unless we have a very exceptional weather situation, which is not something that we're counting on. Next year there should be no news about CapEx beyond what we are talking about here. In relation to yield estimate, if our summer is normal, it will be going up 5%-10%. This is the range.
In a best scenario, the best case scenario, let's say we have a lot of rain during the evening and during the night, and a lot of sunshine during the day, which is the necessary combination, we could go up to 10%. This happened from 2016 to 2017, I think. You can look at the yield curves, and we had a 10% increase, and our sugarcane plantation is ready for that, but it will depend on the weather conditions. A lot of rain during the night and a lot of sunshine during the day. With this kind of situation, you have a lot of very big increase. The summer rains will increase the size and the weight of the sugarcane, and this leads to a better yield. Our goal for the next two, three years is around 24 million tons.
Everything is prepared for that, but we do depend on this weather situation that I described. In relation to your second question about exports and premiums. As I said before, we really don't know what the premium will be for the next year. This year was outstanding, very good. Part of this premium was because the price of the domestic market dropped steeply. Let's say we didn't have the steep drop in the domestic market. Exports wouldn't have been as high as they were. It depends on the tax issue, but the project that we did has a return of about 20%. Even if I place anhydrous in the domestic market at historical prices, anything higher than that means a relevant improvement in the returns. Regarding capital allocation.
You talked about the definition or a possible change in the pricing policy, and because of that, we do not have major projects and we have a project with the Santa Cruz unit, and the CapEx would be BRL 180 million, and during 2 years to have it ready, up and going around 2025. Only this one. This is not so relevant. Whatever we have left in cash, we will be paying out dividends. We are studying this changing mix to produce a little bit more sugar in some of our units. So far, we do not have an estimate for CapEx or for returns. We will try to minimize our exposure to the domestic market as far as ethanol is concerned.
Very clear, Felipe. Thank you.
Thiago Duarte, BTG Pactual. Felipe.
Felipe, good afternoon. Felipe, two additional questions about your CapEx guidance for modernization and expansion. First, of the BRL 220 million more that are included in this line for the current harvest, how much is for flexibilization of anhydrous and how much is for the irrigation project at São Martinho? The first clarification. The second, how much additional potential do you have for anhydrous coming from the flexibilization of your sales? I don't know if you can quantify how much more anhydrous you will be able to make.
Also, I have a question about a remark that you made about the room that you have of 5%-10% to increase yield. I'm not sure whether it's a little bit too soon to talk about that, but how much do you believe that with the increase in crushing around 5%-10%, how much do you think will bring down your unit cash cost considering a lower price of diesel and of fertilizers that have been dropping? Is it too early to talk about that? Thank you.
Thiago, thank you for the questions. In relation to the breakdown of the CapEx, about BRL 60 million will be for the industrial part to make more anhydrous, and the remainder will be for irrigation, as I mentioned.
On the anhydrous side, we can make an additional 80,000 cubic meters if you look at the sugar mix approximately, or more, 160,000 if we do a more ethanol mix. This is the order of magnitude that we can do with this CapEx. In relation to costs, if you look at 7.5%, we should be reducing our unit cost by about 5% for next year. There are some other costs. Although fertilizer cost will be dropping next year, labor has recurrent inflation and also agricultural machinery. We do not see any drop in prices. We have to wait and see. We're waiting for a stabilization in the price of agricultural machinery. In this comparison, it should be dropping an additional 5%. This is the order of magnitude that we are considering.
Super clear. Another follow-up.
With the startup of the corn plant in mid-November, do you have an estimate or a ballpark figure of the amount of corn you will be able to crush still in the 2022-2023 harvest?
It should be equivalent to three months of production. We are talking well, not necessarily sales of a bit because it takes longer to reach full productivity. We have to test with the clients first because they have to test the quality so that they start to place their orders. 120,000 from January to March.
Thank you very much.
Matheus Enfeldt, UBS. Please ask your question.
Good afternoon. About your hedge strategy, Felipe said a lot is yet to happen, but maybe the price is a little bit lower than the past harvests.
Looking at what you have been doing historically, are you going to follow the same strategy or are going to wait for a potential return of taxes and the energy policy to be established by the next administration? And what about the impact of the tax benefits and the tax credits that were approved recently? When will they materialize and how will they materialize, both the state and federal credits, and the impact on the company's results?
Matheus. This is a benefit that the federal government transferred to the states regarding the ICMS tax, and this has already been posted to the result. The figures that you see for the second quarter already include BRL 45 million in the company's results coming from this credit. It's already posted to the results in this quarter. Our results would have been worse if it were not for that.
We have already recognized that. We receive over the next few quarters for this to materialize as cash. Your first question regarding our hedge strategy. We expect that in December, we may have at least half of the next harvest already hedged. This is our initial estimate, and the fact that we have not accelerated so much, it's because of two things. We cannot really recover a lot in the next year, given that the costs have gone up steeply. Most of the players, in our opinion, have not made investments because of a shortage in cash really. Even having a more normal weather, there will be no major impact on the production of sugarcane.
Second, we see a very squeezed sugar market coming from the fact that India is gaining speed in terms of ethanol production there, and they should be removing more sugar from the market and further reducing sugar exports from India. We see this at a very good level for us. We believe that up to 50% up to December should be done because of the company's policy. This is what we expect in the next few quarters.
Thank you.
I would like to remind you that in order to ask a question, you should press star one. In order to remove your question from the queue, please press star two. Please stand by while we wait for questions. Pedro from Levante said, "Biogas energy, how do you see these projects? Any news about diesel replacement?"
We have a cogeneration project at São Martinho.
It was approved in 2019. This project, the plan should be completed or the boiler should be ready by July next year. The plant should be started up in August. More cogeneration next year and for 2025 on, São Martinho would be going up to 1.2 gigawatts of energy in cogeneration. Besides, it will be. It will depend on the price of energy and auctions to check the profitability, so they have the possibility of placing the cogeneration in São Martinho and Santa Cruz as well, but it will depend on prices. The last time we checked, in order to have a reasonable return, it would be necessary to have BRL 280 per MWh, very far from what the previous auction was.
In relation to the biogas, as I said, we are starting at Santa Cruz to do the biogas project by rental platform in vinasse. Part of the biomethane, biogas and biomethane, part of this biomethane should supply about 20% of our fleet, mainly trucks. There is a degree of attraction because it replaces the diesel. When car companies start to produce bigger trucks and a higher torque and harvesters that may run with biomethane, this should unleash a project in the other units. For the time being, we are talking about Santa Cruz biomethane that should be sold as a replacement of gas as a non-renewable carbon source.
In order to ask a question by telephone, you should press star one. As there are no more questions, I would like to turn the floor over to Mr. Felipe Vicchiato. Thank you very much.
Our team and myself will be available to answer any questions that you might have. We will be reporting the third quarter in mid-February. As I said before, sugar prices should be better, and part of our hedge is in longer screens. The cost is already passed. That is to say, it shouldn't go up a lot, and we expect better results for the next two quarters. Thank you very much. São Martinho conference call has come to an end. Thank you very much for participating, and we wish you all a very good afternoon.