By Brazil Stock Guide – Raízen (B3: RAIZ4) expects margins at its Brazilian fuel distribution business to ease from the exceptional level recorded in the first quarter of the 2026/27 crop year as the temporary benefit from geopolitical volatility fades. The company, however, believes stronger regulatory enforcement and internal efficiency gains will keep profitability above the previous year’s level.
The performance of the Brazilian fuel distribution unit more than offset weaker results in sugar, ethanol and bioenergy, pushing consolidated EBITDA higher year over year. Raízen nevertheless posted a loss, weighed down by higher financial expenses and non-cash accounting effects related to the sale of its Argentine operations.
CEO Nelson Gomes said the improvement in fuel margins had three components. The first was volatility caused by geopolitical tensions and supply disruptions, which management considers temporary. The second was stronger enforcement against fraud and tax evasion in Brazil’s fuel market. The third came from lower costs, leaner inventories and a commercial strategy increasingly focused on higher-value products and customers.
“I do not expect the margins we saw this quarter to be repeated going forward,” Gomes said during the earnings call. “They should remain above last year’s levels, but we will not see the geopolitical benefits recur.”
The shift had already begun to emerge in July, according to the executive. Meanwhile, measures by Brazil’s federal and state governments and oil regulator ANP to curb illegal trading have helped compliant distributors recover volumes and margins lost in recent years.
Raízen increased sales of both Otto-cycle fuels — gasoline and ethanol — and diesel, while returning to retail network expansion after a period of stability. The company also accelerated some contract renewals and reported a recovery in sales of premium Shell V-Power fuels.
Capital expenditure at the fuel distribution unit fell 22% year over year, but management denied that it was postponing contract renewals or compromising network growth. Gomes said the decline reflected a more balanced allocation of incentives offered to service station operators, with less spending concentrated upfront and more distributed over the life of the contracts.
Ethanol speeds up cash conversion
In sugar, ethanol and bioenergy, Raízen adopted a production mix more heavily weighted toward ethanol at the beginning of the crop year. In addition to weather and operating conditions, the decision reflected the company’s need to accelerate the conversion of production into cash.
“Sugar takes a little longer to turn into cash than ethanol,” Gomes said. Raízen reviews its production mix weekly and has started directing a larger share of its cane toward sugar, although it has yet to decide whether to carry inventories in anticipation of higher prices.
The division began the crop year with 24 mills, down from 29 a year earlier following asset sales. Above-normal rainfall disrupted harvesting, while early-season milling was concentrated in areas where the cane was less mature.
Agricultural yields and the sugar content of the cane came in below expectations. Management expects to recover part of the shortfall as harvesting moves into more productive areas, but acknowledged that lower throughput reduces fixed-cost absorption.
Unit cash costs fell 9% in the quarter, helped by lower prices for cane purchased from third-party suppliers and by agricultural and industrial efficiency initiatives. Raízen cautioned, however, that the first quarter is not a reliable basis for projecting costs across the full crop year.
Cash improves, but interest burden remains
Operating cash flow reached R$3.6 billion in the quarter, driven primarily by lower inventories and more efficient management of accounts receivable. Supplier financing, however, remained under pressure amid tighter credit conditions and the company’s capital structure.
Consolidated capital expenditure declined 11%, reflecting more selective capital allocation. Raízen said it would continue prioritizing sugarcane field maintenance, industrial efficiency and expansion of the fuel distribution business.
The improvement in cash generation has yet to remove the company’s main financial risk. Interest continues to accrue through the income statement, while the decline in reported debt and leverage during the quarter was partly explained by the reclassification of debt associated with the Argentine operations as discontinued activities.
Raízen secured court approval on July 30 for its out-of-court debt restructuring plan. The company is now working to satisfy the conditions precedent, with management expecting to complete that stage by March 2027 and finalize the separation of the fuel distribution and sugar-and-ethanol businesses by December 2027.
Management has yet to disclose how debt will be allocated between the two future companies. Raízen said its goal is to complete the process with the lowest possible leverage and financing costs for both businesses.
Brazilian federal PIS/Cofins tax credits are another area of concern. Raízen said it used part of those credits in the transaction involving Argentina, but did not quantify how much is protected by final court rulings or clarify the size of any residual exposure.
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