Good afternoon, ladies and gentlemen. Thank you for waiting. Welcome to São Martinho S.A. conference call to discuss the results of the first quarter of the 2022/2023 harvest. Today with us, we have Mr. Felipe Vicchiato and his investor relations team. The audio and the slides of this call are being broadcast simultaneously at the company's website, which is saomartinho.com.br/investorrelations. 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 the participation of 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 to 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. Thank you.
Good afternoon, everybody. Thank you very much for your presence in São Martinho's call about the third quarter of the 2022/2023 crop year. Let's start our presentation with the agenda, with the main items that we would like to approach. First, we will talk about the operating highlights and then the financial highlights, the cash costs, indebtedness, price evolution for sugar in the market, and then at last, ethanol market and the impact after all the tax measures that were put in place in the last few days.
On the next page of our operating highlights, in the quarter, we crushed 7.8 million tons of sugarcane, 10% less year-over-year, given the lower agricultural yield going to 71. Additionally, the TRS that we saw in the quarter was 6% less, 16% less quarter-over-quarter. What impacted the lower crushing and also the TRS was an operating decision on the part of the company to start the harvest of São Paulo mills a little bit later because of the lower availability of sugarcane, trying to get a better TRS more to the middle of the harvest. If you compare year-over-year, you see a lower production.
In spite of this drop, we understand that the crushing or the final crushing up to the end of the harvest year will be according to the guidance that we gave you in the last quarter, something close to 20 million tons of sugarcane, practically the same from the crushing viewpoint as the previous year. For the dilution of fixed costs that we saw in this quarter. We have the summary of the financial highlights on the next page. We sold 3.5% more in TRS equivalent when we put the same base for sugar and ethanol, given the volume of inventory. Because of that, my net revenue went up by 29%, EBITDA, adjusted EBITDA, 27%.
Both, as you can see on the slide on the lower part, you can see the prices both of sugar and ethanol went up quite a lot. Here you have 26% net income of the company grow 16%, and the cash income goes down 4.9% because of the impact of some financial expenses of exchange variation that were under the shareholders' equity. For accounting purposes, you can see that we have to carry this from the accounting viewpoint up to the date of the export. We have about BRL 80 million, and we have mark to market of the swap that we did at the beginning of the year. We decided to swap this debenture. This is a very long debenture, 12 years. When you transfer to the market, it goes to BRL 32 million of monetary variation.
We had a very strong quarter for the payment of ethanol prices that went up over 30% in the quarter. Because up to June, while the effect of the taxes will be as of the second quarter only. We say, we see the cost evolution. We have been talking about that since last quarter. Impacting the cost of production and maintenance CapEx here, as you can see, effectively this is an expense and we have an increase of TRS equivalent of about 30% of each. We have the price of CONSECANA here. We have this 12.9 decreasing over time. I will be crushing practically the same as last quarter. Here you have an increase at the 40% year-on-year, diesel 3.4, and labor and others 1.3 with an effect on this quarter.
It's not very high, but next quarter it will tend to go up. We believe about 12% for the year. With the increase in the unit cost, our cash cost for sugar goes up 34%, 45 BRL per ton, and the price of sugar in this quarter was a very low one. We have a compression of the sugar margins now. In the case of ethanol, the price is 30% more with a margin practically the same as it was last quarter. We have the indebtedness of the company on the next slide, 3.2 billion BRL at the end of the quarter. A very comfortable net EBITDA. You can see here 2.8 billion BRL with three years term, and the remainder will be of about four years.
We didn't reduce the level of leverage of the company because we are in the process of investment. Because of working capital this quarter is still high, as I pay about 30% of the harvest, and then you have the remainder to be paid. We have a cash hedge position. 22/23, we closed with a sugar hedge of about 604,000 tons with an average price close to BRL 12.3 thousand per ton, and 604,000 tons is the volume of sugar that will be sold in the next three quarters. It's not referring to this. This represents about 82% of my exposure for this year, so we are very well covered regarding the volatility of sugar for this year, as well as the dollar.
For comparison purposes, this price of our own sugar in the next few quarters will be 26% higher than the price that we had last year. There should be a reversal of the sugar margin improving the next few quarters because of better pricing. In the quarter, we started to hedge the 2023-2024 harvest. Close to 165,000 tons at BRL 2,400 per ton, and we continue to evolve. Today, it's closer to 250,000 with an average price which is similar, and we intend to continue to do this given the price dynamics of ethanol in the domestic market that should hinder pricing. Today, in terms of mix, we can go more towards sugar than hydrous. The price of sugar today is equivalent to about, well, 10% with hydrous.
In the first quarter, we have a lot of ethanol produced, but it has to do with the mills that were operating faster. We delayed 15 days the São Paulo mills, and the Goiás one started operation much earlier, so the level of production, as you can see, there is a higher production of ethanol, but it is because of this difference in terms of the beginning of the production of ethanol vis-à-vis sugar. We talk about the ethanol market in the next slide, and highlighting here all the tax issue that happened in the last few months. We can see here from mid-June on, we see a major reduction in the price of hydrous ethanol, 15%. When we started to talk about the tax changes up to today.
In order of magnitude, we had the PIS and COFINS taxes here for gasoline and for ethanol when the federal government made a decision about this tax and the gasoline tax was higher than the ethanol. Ethanol lost competitiveness first because then it decreased the ceiling of the price of ethanol. After that, one important point, a decision by the STF. It was decided to keep it for 60 months, and this is the average price of gasoline, which is the basis for taxation. At a certain point in time, the average price of gasoline, it was even higher than the ethanol price. You have an additional loss of competitiveness. It was reverted partially because of the CONFAZ in the last 15 days, when it froze this tax for ethanol.
The Congress approved the tax difference both at the federal and state levels. At the state level, it has already been implemented. Federally, not yet, because the PIS/COFINS is zeroed for these products. Once the federal tax goes, well, the parity does not exist yet. Lastly, we have a presumed credit for the state of São Paulo. It is reaching a final draft. Both Goiás and São Paulo, in August this to December, there will be a credit at the state level. If you look at what happened to the market, you can see an overall drop of 15% in the price. We expect this not to go up at least until December, when the federal tax will be maintained, up to when the federal tax will be maintained zero and the demand for hydrous ethanol is quite low now.
Consumption of gasoline is very high, and hydrous ethanol is lower. We see consumers consuming more gasoline given the speed by which the prices went down. We will be producing sugar and hydrous and because of this demand situation for hydrous. Well, these were my remarks about our results and the market for sugar and ethanol. Now I would like to open for the Q&A session, please. Thank you very much. We will start the Q&A session now for analysts and investors. In order to ask a question, please press star one. Our first question is from Isabella Simonato, Bank of America.
Good afternoon, everybody. Felipe, the volume of ethanol that you were able to export this quarter really draws attention.
I would like you to get into details about your strategy and how do you see the mix from now on, what kind of price opportunities you can see for this kind of market? My second question, you mentioned a mix more towards sugar because of the price difference. How do you see the industry in the Center-South for the remainder of the crop year so that we may better understand the supply-demand scenario? Lastly, there is a cost component that was affected by the delay in the harvest. How do you see cash cost from now on? Isabella, thank you for the questions. In relation to ethanol exports, there is a major demand for anhydrous ethanol at the European market. There will be some also in the second quarter.
This ethanol, as we have shown in our income statement, we sold a little bit higher than the local market. It was about BRL 4,000 per cubic meter. You have all the details about that in our financial statement. We expect this to be maintained in a two quarters. Our idea is to do something close to 150,000 cubic meters of export. This removes part of the pressure on the domestic market because the demand for hydrous is quite low here, consumers preferring gasoline because of the circumstances. Regarding the production mix, we understand that, the mills are going more towards sugar, but there is a limitation in terms of raw material in this sector.
Probably the current harvest will be equal to the last one in the best hypothesis, and you can see the numbers of UNICA regarding the production of sugar and ethanol. Production of sugar shouldn't be much higher than in the last harvest, but because of profitability, everybody going more towards sugar. Lastly, regarding cash cost, we had this impact so that in the first quarter. Well, as you know, there is an impact on the unit cost. At the end of the day, what we estimate here is that year-on-year, we will see an increase of about 10%-15% more cash cost because of the inflationary impact. Diesel going up 60%, and the diesel that I bought in the last harvest, I bought when the oil prices were quite low.
Diesel was cheap, and I was able to sell a more expensive ethanol. We focused on ethanol because of that. Now we are paying more for diesel, and we are selling up to June a cheaper ethanol, and then after June, more expensive because of the tax reason that I have already referred to. The impact of fertilizer is 72% for it, as this is common for the sugar and alcohol industry, and it has an important impact on our costs. We try to be as efficient as we can in the harvest, harvesting more sugarcane per harvester. Later, the yield, I believe it will be 73, 74 TCH at the end of the year. In order of magnitude, 10%-15% more vis-à-vis the full year last year.
Very clear. Thank you, Felipe. Gabriel Barra, Citi.
I have two questions, Felipe. The first one has to do with yields, a very complicated situation in the past. I would like to know how you see from now on. I understand you will have a recovery of TRS for the next two quarters, reinforcing the guidance. Looking at the medium and the long run, how can we see the productivity impacting the next two cycles? What could we expect about the higher CapEx for the renovation of the plantations in order to guarantee yield increase? Or do you have a more conservative view because of prices? This is the first point. The second point has to do with the corn ethanol. What was the impact in terms of return or profitability for the project?
We have been seeing some players looking at this kind of project or corn ethanol, even in regions that were not very convenient for this kind of crop, such as São Paulo. What could we expect from you? That is to say, do you intend to go with São Paulo and not only Goiás for the corn ethanol production? Good afternoon. Thank you for the questions. Let's talk about productivity or yield first. The yield this year is impacted basically because of the dry climate that we had last year and a very dry summer, mainly. We came from a very bad base from the viewpoint of weather and from April to November for the full harvest in 2021, and with a very bad summer from November to March in terms of rainfall. The result of this combination is this drop in the TCH.
For the next year and for the long run, as we are improving the overall production of the 18-month sugarcane, more resilient, more productive, let's say this is a normal summer with abundant rainfall. We will be able to recover this yield. Just to give you a figure, in 2018, if I'm not mistaken, we had a very complicated. It was 64-65 TCH. In 2019, it was close to 82-83 already. The recovery is very good if you have the necessary rainfall. If rainfall does not come at normal levels and we continue to have a dry summer, then the yield will be impacted for next year as well. Then it will be dropping from 73 down, because if you have two years of a dry summer, it could lead us to an even worse situation.
Apparently what we have in terms of forecast, we will have a normal summer rainfall-wise. It's too early to say. We are still in August, apparently the summer will be normal in terms of rain. We need a longer time to talk about yield for next year. Regarding your other question, we are not going to accelerate the renovation. When you accelerate renovation, you will have a very high CapEx, and you end up losing one year of harvest if you do that. It is not worthwhile. We do not intend to increase the renovation rate. We are decreasing the purchase of agricultural machinery. They more than doubled in price. We are doing the math in order to have our correct check and balance. This is another point. The prices of agricultural machinery, some in some cases more than doubled the price.
We need to extend the useful life of the current equipment by means of maintenance, et cetera. That would be a better option now than buying the new ones. Lastly, the return of the corn plant, the corn mill. If we imagine that the price of ethanol will remain where it is now, PIS and COFINS not coming back in the short run, and there are some talks going on about this, and PIS and COFINS might continue to be 0 in 2023. Supposing the price, well, the return, we were talking about 25% return, and this would go down to about 17. It would still be okay, but it would be very close to our limit. The cost of capital is 16%-17%, so. We are talking about two assumptions.
First, that corn will always be BRL 70, which is highly unlikely, because at this price, producers will have no incentive to produce more corn. The PIS and COFINS remaining for the long run is also unlikely. It's important to remind you that the PEC of the fuel was approved now. We believe that at some point in time, this will prevail.
Very clear, Felipe. Thank you.
Daniel Sasson, Itaú BBA.
Good afternoon, everybody. Thank you for the questions and for the presentation. My first question has to do with the corn mill. Could you talk about the timeline and the construction of the plant, whether there is some change in the expected CapEx because of the cost inflation, and if your start up will continue to be the same or will be postponed?
Regarding the other expansion project, during the last conference call, you talked about the decision to invest or not in biogas that you could be resuming by the end of this year. Have you made any strides in terms of the feasibility study that you were carrying on? Daniel, thank you for the questions. In relation to the corn ethanol plant, there has been no increase in the CapEx after the last material information that we sent to the market. Initially, it was BRL 650 million of investments. Then we published 90 plus 90 million going to 740. This was the material information that we published, and this will be final. We already have the storage ready. It is according to schedule. It should be ready to be started up in October, November.
With the commissioning before and full operation with daily production more around the mid-January. The schedule continues to be the same, no change. Overall, if we need to delay a little bit, there will be no problem whatsoever. Because selling ethanol in this period up to December, given the PIS and COFINS situation. We believe that we would be selling at a lower price or even than the cost. The idea would be to do this at, from the beginning of the next year, from January. We are on time, we are on schedule, and we are on budget. The biogas expansion, we expect to reach a decision by the end of the year. We have already worked on that quite a lot in the last few months. Together with the main players or technology players.
We should be announcing something closer to the end of the year. As I said before, our cost of capital is around 16%, which means that we need to be safe in terms of CapEx, and we have to detail this regarding investment and with the price of gas that may remunerate in an adequate fashion. This is not a small investment. We are talking about BRL 140 million-BRL 150 million. We have to make an in-depth analysis to be able to make a decision. We should reach the decision by the end of the year, whether we will continue or not.
Thank you very much. Very clear. Lucas Ferreira, JP Morgan.
Good afternoon, Felipe. About the federal taxes coming back or not, and reinforcing the carryover strategy for the period between harvests.
You said that you're still discussing this, so my question is the following: what about your inventory, ethanol inventory? Will you try to reinforce your strategy or carryover strategy for next year? The next question is about CapEx. You are going to make a decision about the expansion, but let's say you decide to wait a little bit more. What about the capital allocation, dividend, et cetera, and the Copersucar situation? What could we imagine in terms of your leverage target and how much you could return to your shareholders? I wish you a lot of luck, and thank you for all these years. Well, as you have touched upon the subject, today, the last day, after 12 years, you decided to leave me, but okay. Jokes apart, I thank you very much for all the work that she has done for São Martinho.
Let me get to your points. In terms of ethanol, the presumed credit that the federal government gave to the states, it makes states transfer to the mills from the sale that occurred between August and December. The amount is BRL 0.15-BRL 0.20, Lucas. The decision to sell hydrous ethanol, I'm talking about hydrous, okay? The decision to sell hydrous between August and December, we have to do the math, and we have to include the presumed credit in the decision. I don't believe all the mills will be holding back the ethanol inventories to sell as of January because there is this question mark regarding PIS and COFINS, and there is the benefit from August to December vis-à-vis the presumed credit.
In our case, we are still evaluating this, and the large volume of hydrous we have is in Goiás, not in São Paulo. In Goiás, we have already sold quite a lot in the third quarter, so we are still evaluating when will be the right moment to sell. It has to do with the market price and the presumed credit and the CBio, of course. The capital allocation for the next year. The corn ethanol plant, the second phase will be for the next year when things are more clear. The PIS and COFINS situation, what will be the price of oil and all this will make a difference. Maybe it will not be $60, maybe it will be $65, the oil price, and it would change the return on the project. There is another point which is very important.
In the previous answer, when I mentioned that the return of the corn ethanol project would be around 15% in the worst case scenario. There is an assumption in the process that I'm not going to sell energy at spot price, let's say 150 per megawatt hour. Let's say my cost of opportunity is lower than that, the return of the project will improve. Why am I saying this? Boa Vista in 2025 will be ending the long-term contract of when I started the project way back then. I will have a very large volume at Boa Vista to sell at the spot price and contract it for a few years. Depending on the price of this energy, it may be more feasible to use this energy, then sell it at a lower spot price.
These things are interconnected, and at the right point in time, we will be making our decision. Capital allocation. Biogas, for instance. We intend to leverage this product. The value that will be placed by the shareholder will be less than 100%. We'll continue with the dividend and return on equity payout. If the share price stabilizes, we will go back to the share buyback project. Thank you.
Luiz Carvalho, UBS.
The sound is very bad. Let's talk about capital allocation. In the current scenario of financial expenses, we see a more stringent cash situation. Looking ahead, your capital allocation project. I would like to know your opinion about that. What about your strategy? Are you going to hold on to your inventories? You have been using this strategy. You make a comparison between ethanol and sugar on your slides.
CBio, BRL 90, we saw very high volatility. I would like to understand your strategy to sell your certificates. The interpreter apologizes, the sound was very bad. In terms of capital allocation and a more stringent scenario, still within this year, we should have an EBITDA more or less in line with what it was last year. Supposing the prices and the costs remaining where they are, the financial expenses basically go up because of the interest to be paid in the financial expenses of the quarter. There are many items that are not recurrent and some have no cash impact. About BRL 120 million have to do with the mark to market of derivatives and the exchange variation that I paid in the past, but was in the hedge accounting.
From the accounting viewpoint, it is posted now. So we believe that BRL 350 million in financial expenses, supposing the interest rates remain as they are. In spite of all that, with lower ethanol prices, we still have a very good cash generation because of the Copersucar credit that should come still before the end of the year. Our doubt is about next year. Next year, we see a major expansion in the sale of ethanol, 220,000 cubic meters of ethanol at Boa Vista. The second doubt is yield. If we have normal, quote-unquote, rainfall, and we may bounce back to historical levels of yield, we decrease the cost, and we go back to a higher level of competitiveness, but it will depend on the rainfall. Nine months ago, if you compare to today, the scenario is worse.
Basically, because of ethanol prices. I'm not talking about cost here because the cost was deteriorating for everybody. If oil goes back to normal prices, we might be able to recover part of that. Regarding our sales strategy, your second question, as we said before, we are exporting ethanol because the demand in the domestic market is still low and because consumers are preferring gasoline, and ethanol for Europe. It's much better because the prices are better and the demand is higher. We still have some to do, 150,000 cubic meters to Europe in the second quarter, more or less. Here, the sales of ethanol, we have to make a decision about selling as of January because we have the presumed credit to be received by the government.
CBio had a very big volatility because of the changes of RenovaBio and Congress approving items to remove the mandatory acquisition. It oscillated quite a lot. It went down to less than BRL 100, for instance. When we have CBios available, we will be selling like we are selling now. We sold our inventory and it helped a lot in terms of the company margin, and we intend to continue. I don't know. Have I missed something?
No, very clear. Thank you very much.
Leonardo Alencar, XP.
Good afternoon, Felipe, Aline. I have a few follow-ups. You talked about agricultural yield. The first quarter, it started a little bit weaker, but you said that the guidance will continue for the full year.
Could you talk about the short run, the yield for the next two quarters and maybe giving us a seasonal reading, so to say? And you talked about sugar, that in the next quarter we could expect an accelerator of your hedge because of the strategy that you described. But as the average yield of the sector might be lower, don't you believe that others would have less availability of sugar to hedge? And when you talk about COGS 10%, what is the assumption on the fertilizer side, which is a variable that may bring a lot of clarification? Thank you very much for the questions. In relation to productivity and the guidance, in the third quarter, we harvested sugarcane that was affected by the frost that we had last year.
We made a decision to harvest this sugarcane early in order to protect it, in order to treat it should there be another frost this year. What did we do? Instead of waiting for the sugarcane and harvest it in August, and there could be the risk of having another frost, we decided to bring this forward. This is the reason why we had a sugarcane with a low TCH. When you harvest a sugarcane that was under frost, the TCH will be much lower because it stops growing. The sugarcane will have just a few months, a couple of months to continue growing until the harvest. In the first quarter, we had to do this. It has to do with agricultural strategy of harvesting or having an earlier harvesting of the sugarcanes in order to avoid it to be exposed to another frost.
Because this is where you have a problem. Generally, when you have a frost in the region, in lower parts of the region, they suffer a lot when you have a few days of lower temperatures, such as was the case. We have already talked about that, and today we have no doubt about this. Today is already August 10, for instance, and the risk of frost is water under the bridge. This is the reason why we say that we will be reaching the guidance. Growing 10%-13% means 40% at least. We're talking about fertilizers now, and the fertilizer that we buy are for the crop treatment. We buy fertilizers during the harvest. Even if the prices go down, this number, 10% should not change a lot, especially for this year. It could change, for instance, if diesel drops.
Fertilizers, we have already bought almost everything that we need. About hedge. Yes. From the hedge viewpoint, what we see is that some mills are trying to remove contract because they do not have the necessary production, and this is not the São Martinho case. We do not need to do that. Looking at this year, for most mills we have already hedged. For the next year, many people are evolving with a speed similar to São Martinho. For the next few months, we expect, let's say in September, we expect to have about half of the next harvest locked. This does not mean that the sugar price will not go up. We have a growing demand. The point here has to do with risk management. Sugar is a product that I have liquidity and I can sell it together with the dollar NDF.
Sugar will represent about 30%-35% of the total. Having the total TRS locked at a good level, we understand it is very prudent in a more volatile scenario.
Thank you.
Thiago Duarte, BTG Pactual.
Good afternoon, everybody. I think another point we should still discuss has to do with your reading. When you talk about recovering yields as of next year, you said, "Well, if we have a normal summer, it's a little bit too early to say anything about that," as you said yourself. We will be able to recover yields and bring this back to historical levels. I would like to confirm this because I would like you to confirm that. I think it was in 2018. Of course, the company is dealing with hydric stress for a long time, I think since 2018, if I'm not mistaken.
In normal conditions, normal rainfall conditions, could we see a recovery already next year for historical levels of TCH? Or the hydric stress would continue until the sugarcane fields can recover totally?
Thank you for the question, Thiago. Yes, it's totally feasible. Next year we could be crushing 22 million tons, a difference of 10% vis-á-vis what we are doing now. Our agricultural practices, our management is better than it was four to five years ago. This is the minimum that could be expected. Talking with the agricultural team of our company, what they say is that you treat the land, and if it receives the necessary rainfall as of November, January, February, the sugarcane will recover. What is really bringing us down is the Santa Cruz mill with 65 TCH because the soil is poorer. It's sandy.
When you have a sandy soil and you have a dry summer for two consecutive years, the yield becomes very low. At São Martinho, São Martinho is suffering as well. It's around 65 TCH. Should the rain come, we will be recovering and growing 10% from 18 to 19. We grew almost that in terms of yield year-on-year. The sector grew about 4%. São Martinho is suffering, and all the other mills that are located in the same region are suffering as well. São Martinho plus Santa Cruz, together they respond for 13 million of 20 million. These were the areas that were very impacted by weather conditions. If you look at the map, you can see that it's very bad.
Having said that, we could recover and go back to 22 million tons and maybe reach 24-25 million as we have in our business plan.
Thank you, Felipe. Christian Audi.
Good afternoon. I have a question about hydrous ethanol exports and your guidance. Could you quantify this? The export volume of anhydrous for this year, we are already doing it. We have already done this quarter. You can see this in our release, and we will have the same in the next quarter. So there is nothing additional. We are talking about the current harvest, and we are already doing that. We're not talking about next year. Follow-up.
Would you like a follow-up on your question, Mr. Audi?
Thank you. No, I'm satisfied. Thank you.
As there are no more questions, I would like to give the floor back to Mr.
Felipe Vicchiato for his closing remarks.
Thank you very much for your presence in the call. Good afternoon, and we remain at your disposal should you have any doubts. Thank you very much. São Martinho's conference call has come to an end. Thank you very much for participating, and wish you all a very good afternoon. Thank you.