Cosan SA (CSAN) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Cosan Ltd. and Cosan S.A.'s fiscal year of 2008 results conference call. Today with us, we have Paulo Diniz, CFO and Investor Relations Officer, Pedro Mizutani, Chief Operating Officer, Marcos Lutz, Chief Commercial and Logistics Officer, and Philippe Johnson, Investor Relations Manager. We would like to inform you that this event is recorded and all participants will be in a listen-only mode during the Company's Presentation. (Operator Instructions).

Before proceeding, let me mention that forward-looking statements will be made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Forward-looking statements are based on the beliefs and assumptions of Cosan Ltd. and Cosan S.A.'s management and on information currently available to the Company. They involve risks, uncertainties, and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions, and other operating factors could also affect the future results of Cosan Ltd. and Cosan S.A. and could cause results to differ materially from those expressed in such forward-looking statements.

Now, I will turn the conference over to CFO and Investor Relations Officer, Paulo Diniz. Mr. Diniz, you may begin your conference.

Good morning, everyone, and welcome to this earnings release joint call for Cosan Ltd., listed on the New York Stock Exchange under the ticker CZZ and it's subsidiary in Brazil, Cosan S.A. listed on the Bovespa Stock Exchange under the ticker CSAN3. We will be very brief in our general overview for the year in order to profit from the presence of Pedro Mizutani, our Chief Operating Officer, and Marcos Lutz, our Chief Commercial and Logistics Officer so that we can have a richer discussion about our operations in the Q and A session.

With regards to Cosan Ltd., the twelve month period ended last April presented a very opportunistic growth situation. Unlike other commodities, the price of sugar and ethanol remain at very good price levels in key markets due to the growth in production surplus of these commodities.

On the other hand, we start to see a relevant cost inflation in many other culture imports which has been properly (inaudible) so far. Natural gas low price levels combined with abnormal rise inflation costs modified by the adverse effects of exchange rate eventually penalized the results of companies operating in this industry.

It was in this environment of depressed prices and cost inflation that Cosan Ltd. closed its first fiscal year with sales of 406 million gallons of ethanol and 3.1 million tonnes of sugar generating net revenues of $1.5 billion and EBITDA of $94 million.

If on one had the price appreciation of the real against the dollar penalized the performance of the Company, on the other, it contributed to the last financial income of US$116 million which mitigated the loss booked before income tax. Bottom line is that considering the minority participation of Cosan, S.A., Cosan Ltd. recorded a net profit $16 million in the year.

As far as Cosan S.A. is concerned, the Company closed the year with feelings in terms of production, operations, and strategy. One of the reasons for celebration is related to cautious volume of 40.2 million tonnes of sugar cane, a growth of more than 11% over the previous year and a new production record for our Company.

In terms of operating performance, we are in the market context mentioned before of depressed prices, cost inflation and other adverse FX moves. The results were really lots of factors. The average price of R$454 per tonne of sugar sold by Cosan, fell 32% in the year while the average price of R$714 per cubic meter of ethanol dropped 20% compared to the previous year. Thus, even with record sales volume of ethanol, which reached over 1.5 billion liters, that is a drop of almost 20% over the previous year. In addition to over 3.1 million tonnes of sugar, the net revenue for Cosan, S.A. was at R$2.7 billion. In other words, that means a drop of 24% over previous year.

Despite the proportion of the depressed price were passed to growers on the acquired sugar cane, adverse weather conditions meant a long crushing season, declining production idleness, and eventually increased the overall cost for the crop. Also, as mentioned before, the agriculture sector in general faced a sharp cost inflation. Thus, the EBITDA for the year was severely compressed to R$172 million, a reduction of 81% over the previous year. However, if we incorporate the results of hedging activities, the decline was softened. The rise in EBITDAH of R$398 million or 52% reduction compared to the previous year.

As a result of the sizable drop in operating results, the EBITDAH was not sufficient to absorb the depreciation and amortization charge for the year. As a result, even with an exchange gain on the debt denominating dollars, the bottom line ended up in a net loss of R$48 million, although totally in line with previous disclosures and guidance provided in the past.

In strategic terms Cosan fulfilled the year, fulfilled the predictions in its guidance a year ago of poor year results, but very rich year on the strategic front. By way of the guidance for this current fiscal year, we are labeling it as a year of strong construction which shall shape up the future of Cosan.

Still with regard to the fiscal year ended last April, Cosan promoted its corporate restructuring and strengthened its capital structure through the IPO of its parent company, Cosan, Ltd., capital increase in Cosan, S.A., and exchange offer, promoting a net inflow of $1.4 billion in equity and increasing the participation of Cosan, Ltd. in Cosan, S.A. to more than 62%.

In addition, Cosan partially redeemed their 2009 bonds, extending the average maturity of its debt and eliminating the financial covenants, achieving an investment grade covenants package.

Finally, Cosan continued with its aggressive growth plan with continued investment in co-generation, brownfield, greenfield, agriculture mechanization and operating improvements. Plus the important acquisition of Banalcool for the production of sugar and ethanol, and also the investment in export logistical sugar through the merger with the Teacu Port Terminal and the consequent establishment of Rumo Logistica.

And finally, the vertical integration through the purchase of Esso assets in Brazil. Again, strategically speaking, it was a very unique year for Cosan.

So these were the main highlights for Cosan, Ltd. and Cosan, S.A. with regards to our 2008 fiscal year ended last April. I guess we can pass now to the Q&A session.

(OPERATOR INSTRUCTIONS). Sir, our first question comes from Chris Agnew from Goldman Sachs. Please go ahead with your question.

Hi, thank you. Good morning. If 2009 is going to be a year of construction, I was wondering, can you give us some color on your thinking on brownfield versus greenfield expenditure next year? And if you can, can you give us any sort of CapEx, sort of breakdown of Cap Ex between those two areas? Thanks.

Hi, Chris. Basically in our quarterly letter, we already provided that guidance for CapEx. You can see roughly speaking last year we had R$1 billion in terms of operating CapEx. And we have already provided that guidance of an increase in the range classified between 5% to 15% so that will continue with a very aggressive CapEx plan.

What I meant was, can you give us any-- can you quantify how much of that will be brownfield versus greenfield? Or if you can't give us numbers, maybe just describe are you more inclined as you're looking forward at maybe make acquisitions versus investing in more greenfields capacity outside of what you've already announced?

So continued EPS are basically the way that we see that we have some investments that when you start there's no way that you can stop them. It's like when you're building a bridge. If you build 60% of that bridge and you (inaudible), you have to finish. This is precisely the case with our first module of the greenfield (inaudible) module. We are moving at full speed in that one. And next crop we should be crushing 500 tonnes of sugarcane out of that first module in the year after we are coming out of that total capacity of that module for 4 million tonnes.

At the same time, what we are verifying is that some of the acquisition targets in the marketplace, they are starting to present decent figures in terms of acquisition price. Consequently, we could very well slow down the other two modules in order to pursue something different. Therefore, I would say that this has to be played by the year in the sense that given if acquisition targets are more interesting, may represent a higher value to be created to our Company, we would be putting more assets on those actions and vice versa with regards to brownfields and greenfields. So this is basically what we are trying to do as we speak. But again, the target of getting to the 60 million tonnes that we mentioned a couple of years ago, to achieve that by 2012, this is something that the Company is working and we do expect to get there, perhaps even earlier than that.

Of course, besides the crushing site, we are also putting a lot of effort on the co-gen business. This is a business where from a revenue point of view, it may not be as relevant as the revenues created by sugar and especially now while the revenue is delayed by the distribution from Esso. However, from the cash flow, this chain shall be very, very relevant. We shall be participating in the coming energy auction mid-August and also in discussions with energy companies on bilateral agreements. And again, this is for our group also another very important diversification in terms of cash flow especially with regards to stability.

So to make a long story short, when we say that this is going to be a year of strong construction, this is basically because we firmly believe that to be a winner in this industry, you cannot see just the link involved in the production of sugar and ethanol. You do have to take a serious look at the whole business chain and take a position in the whole business chain so you can lend development, optimum distribution, plus logistics and energy co-generation. Thank you.

Okay. Then maybe a link to that -- the acquisition you made of the Esso assets--can you give us an update on that? When do you think possibly you could be including those in your consolidated numbers? And since you made the initial announcement, I guess you've been working closely with the company on integration. Has your view or anything changed in terms of the advantages you see of the transaction?

This is Marcos Lutz speaking. First of all, what we have in mind as a ballpark through the end of the year, there is lots of IT development to be done. This is -- I would say this is, if not 100%, 99% of what is being done to enable us to change control. And this is working, this work is large work but it's actually completely on schedule so far. So ballpark the end of the year, we might be one month late, but that's sort of August so that's kind of where you should expect that.

In regards to the operations itself, so far we have very good news in all aspects. After getting closer and getting more (inaudible) operation, we've also seen improvement. Obviously the appreciation of the Real has improved this year itself. Basically causing (inaudible) pricing in dollars and in Reais. The operations of the whole sector in Brazil are improving and the distribution business in Brazil is improving with improvement of the regulation in Brazil. So other assets that are not usually disclosed in the (inaudible) but could also increase our view on valuation without changing the price. So we've been having good news the more we get closer to the operation. So I think for now that's pretty much it.

Okay, thanks. And final question, in your discussion issued during the press release, you talked about you're forecasting for giving guidance for sugar price to be at 15% over last year which was I think 11.43 average price per pound. But then you talk about a lot of factors, for example the Russian import tariffs being reduced, the reduction in production in India, potential worse yields in India, and maybe yields being down slightly in Brazil. What-- I'm just curious as to why then you're being cautious with only 5% to 15% increase in sugar price for year over year.

Well, we have-- let's separate things. So first of all, the fundamentals of the industry have been improving dramatically to make a long story short. Now production and consumption in the world is (inaudible). It was big surplus last year, it was a big surplus two years before. So what we've been facing now is basically the world consuming a level of inventory never achieved in the past. And this inventory is sort of creating a (inaudible) on the market that actually impacts a little bit, or a lot, the physical market.

What is hard to control and what is the big question mark when we do our hedging policy here is what the fund will do with it because when you have a tight market, it's very easy to predict because then the physical market actually moves. And this tight market is coming. So what we are seeing is, in a year from now we will be facing a world that will need more production of sugar and we'll have to finance that increasing production. We'll continue Brazil going flat on production of sugar and increasing dramatically the production of ethanol just because the amount of ethanol is growing. And let's say the profitability of the ethanol been higher for two years than the profitability in sugar.

This has to change in order to allow people to expand sugar production to fulfill the world needs. And then going to specifically to your question, I'm not sure what exactly your point is, but if you get the numbers we normally disclose every quarter of record, we have our hedging position there and this hedging position, the intention of this hedging position is actually take out part at least of the volatility. So then we have price increases in sugar, we should expect to lose money on our hedging position. When we have price decreases in the sugar, we have to expect to make money on this hedging position. So if you discount from this hedging position, probably you will answer your question. But maybe I didn't quite get your statistic question discussed.

Just explaining what Marcos said, I guess it's important to mention that when we provide guidance is not guidance compared to the benchmark in the marketplace. And of course it is comparing to our last figures, okay? So when we are talking about guidance with regards to price in relation to sugar price, it's with regards to our last fiscal year. And therefore, we cannot only take the position of the sugar price in the marketplace that as Marcos said are going up and getting strong, but also we have to ponder what we have already hedged in the past and this is what is disclosed in our quarterly letter.

Therefore, as a result of that, if last year we a had hedging result, if you like, in the P&L of income of R$220, almost R$225 million, we do expect a much lower income from hedging activity this year. In fact, in terms of sugar price, we should be verifying a negative income and the positive income should be coming from the FX hedging. So this is just a small part to compliment what Marcos just said.

Great, guys, that was very clear. Thank you very much.

Thank you. (Operator Instructions). And Sir, our next question comes from Fernando [Ferrera] from Merrill Lynch. Please go ahead with your question.

Sure, thanks. I'd just like to know from you, what are you seeing in terms of the outlook for ethanol exports from Brazil mainly to the US? Because we recently saw that with the decline in corn prices, now the exported prices from Brazil are not viable anymore as they used to be a month ago. So do you expect this to have a negative impact on the ethanol exports from Brazil going forward? Thank you.

Okay, it's Marcos Lutz. Well what we see in terms of respect of this year is that approximately 4 billion liters of Brazilian ethanol has been booked for exports this year. This is pretty much our (inaudible). And this is basically commitments between producers and trading companies. What is sometimes the case is that some of those trading companies are depending on the wash out costs, can wash out part of this if arbitrage activity is negative. But what normally we see is that the bulk of this ends up being committed ahead and actually it is probably to be exported anyway. So our prospects for US-EU market is around those numbers, remembering that part of that is industrial grade ethanol that actually has a different and more captive market and more constant market.

So what we see this year is that will be solid results through a two/three month window but under that actual booking, the year exports, and this is normally the case. The Brazilian market is very disconnected from the US market in terms of price and you see arbitrages going on and off all the time and people normally take advantage of the arbitrage moment to book for exports. So this is the case for Cosan, it's the case for the Brazilian market.

Okay, thank you.

Sirs, our next question comes from [Yeshwan Holcar] from Arthe Capital. Please go ahead with your question.

Mike Schwabe. It's actually Mike Schwabe at Arthe Capital and I apologize, I joined the call a little late, so if I'm going to make you repeat yourself you can tell me and we can discuss it separately. The first question is whether-- are you aware of any significant initiatives in the US to really bring down the tariffs for ethanol imports from Brazil which obviously from an economic point of view make an enormous amount of sense? And the second question is, the shortfall, if you want to call it that, in Brazilian sugar production so far this year, whether you believe that that can be made up in the second harvest? Thanks.

Again, I don't understand what exactly is the second harvest, but afterwards you can just explain it. In terms of big initiatives, obviously we have through our production association in Brazil, UNICA, we have established efforts in Washington and in Brussels to try to foster this discussion and to support the Congressmen and the people that actually are trying to open up more of the market. But what is a discussion that is quite let's say solid at this point, is the discussion of reducing the tariffs for the current $0.54 a gallon to $0.46 a gallon which is let's say the domestic figure that the US gives for the blended. This has been very recurrent. We've been seeing discussion very closely and we anticipate that this has probably to be implemented after the presidential election in the US I think. And all our sources basically say that this moment from now to the election is very hard for any large political moves.

But again, as you mentioned as well, the economics for doing something on those lines are probably the best thing on the energy that can be done in the short term with very small negative impacts and very good positive impacts. So we are very positive that something will happen in the near future on those lines.

And the EU side is also a big dimension in that. Currently there is 193 or 195 (inaudible) for cubic liter for Brazilian ethanol as well. This is catching also with (inaudible) at this point. Around this fuel versus food discussion people are also envisioning that burying the Brazilian fuel ethanol is not helping much the programs locally. And the total in Europe has already been able to have good profitability without having the big support from the fuel side. So this discussion has been more and more matured and we feel that it is a question of time. So we are very bullish about it. But can you explain to me what is exactly your question about sugar and the second crop you mentioned?

Yes. In Brazil, I guess I'm thinking in terms of calendar years, to begin with, not fiscal years. But in Brazil, the harvest that we've just had in Brazil, I guess the yields have been lower than expected and therefore the overall production of sugar/ethanol let's say has been a bit lower than what some people had predicted. And I'm wondering whether the, in the next crushing season, which I believe is October but I could be wrong, whether you think that that difference from what was expected to what actually has occurred can be made up either because the weather is better or other reasons.

The crop you mentioned that starts in October should be probably the Northeastern crop which is a very small crop from Brazil. The Central-South crop which is the one that starts in April and pretty much finishes in the end of November, middle of December, this one at this point is roughly 480 million tonnes of cane compared to something that is a little above 10% of that in the Northeast. So there is no way that the Northeastern crop could basically fill the gap for the sugar. What we believe is that the mix between ethanol and sugar can shift towards sugar if prices go up. But currently, the ethanol is pretty much in terms of profitability, it's 20% or more above sugar at NY11 [parodies]. So there is a big gap to be filled to make producers actually go back to sugar here in Brazil. So we've been mentioning that before you came to the call, but there is in our view here and according to the association, according to the International Consultants for Petro, the world is now moving to a shortage of sugar production versus consumption. And obviously consuming what is the largest inventory created so far in the sector, this is happening this year already and we see that in the near future, prices have to adjust to a point where people will be incentivized to produce sugar again. So this is very clear to us here.

And just to add two points here on what Marcos just said, first one is that all the estimates that we have now, they indicate a drop from the 500 million tonnes of sugarcane to Central-South to 480 million tonnes (inaudible). So we do not see any recovery in that for this crop. And perhaps what is even more important is that the many producers, or the great majority of producers, they are not treating the sugarcane as quickly as they should because again, as was pointed out, we are seeing a cost inflation on the liquids for the sugarcane. Therefore, also when we extrapolate that situation for the next year crop, what we see is that as far as productivity, as far as yields are concerned in terms of (inaudible) content, next year crops also going to be (inaudible). Therefore, I'd say that (inaudible) keep treating their sugarcane plantation properly. I guess they may see a very interesting benefit in the next crop because as Marcos said, sugar prices, they should already start to reflect reality from next year onward.

Okay, thank you.

(Operator Instructions). Sirs, our next question comes from Jose Chevallier from Capital Air Capital. Please go ahead.

Yes, I have a twofold question. First, I understand that you tried to buy the Esso assets in Chile recently but were outbid by Petrobras. And the first part of my question is, do you have intentions of pursing any more downstream assets? And the second part of the question is, do you foresee great benefits from vertical integration? In other words, has the Esso acquisition in Brazil already helped you to sell more ethanol and/or better the price that you're obtaining for the product? Thank you.

This is Marcos Lutz speaking. We never pursued, not even saw one member about Chilean assets of Esso. Esso.Mobil is divesting some assets in South America and many other countries. We never, ever discussed one minute about those assets in Chile. So we never pursued that. We are also not pursuing other assets of distribution outside Brazil because we believe that the vertical integration is a reason for doing that and vertical integration currently happens to Brazil where ethanol is more than half of the ultra cycle fuels and therefore a really big growth component. So therefore we believe more and more we'll be integrated and we'll be producing what we'll be selling in distribution assets in Brazil. We don't see any country with something close to that. Actually if I had to point to one country, in Stockholm we have a big project of (inaudible), but again, it's small and far from our position here. So we won't pursue that.

Vertical integration, yes, there's lots of advantages on that. Logistic ones. I mean when we produce strato all over the country, especially strato all over Sao Paulo where you have the largest fleet in Brazil, you do have advantages when you ship directly from the mill to the stations. You don't have to have one leg more of truck transportation. When you can carry inventory in lower cost, allows you also to be more aggressive on sometimes taking position on inventory of ethanol which is quite a cyclic and volatile (inaudible) crop.

And we do believe that the ability to reprogram our sales book between internal and external markets towards having strong book exports and a strong book of domestic markets, can allow us to capture better the arbitrage opportunities that normally offer very short windows of time. So that's for us the main message for the integration with ethanol.

Okay, another question I have is regarding the integration of the two Cosans. Do you foresee another effort in doing that this year or next year? And how-- what would you do about the price gap between the two different shares?

Well basically we promised, what we promised to do, we did, and that was restructuring that culminated with the exchange offer. We, as you pointed out, we have a situation nowadays where there is a premium for (inaudible) CZZ. However, I guess one has to take into consideration that we are facing a difficult situation in the sense that today CZZ is being penalized by the negative tariff with regards to the cash situation over there.

Second, (inaudible). At the moment that's been such an operation, an international operation also that shall be producing this gas. Third, we also have (inaudible) of the most liquid share in the (inaudible) stock exchange. And also, being part of the Bovespa index and part of the MSCI. Therefore, today you have initial movement of investors that if they want to replicate the either the Bovespa index or the MSCI index, they just buy Cosan for the sake of buying. However, we are paying close attention to that. There's no real let's say reason why you should have such a discrepancy. And of course as time continues to pass, these actions should be taken on both companies in the better interest of the shareholders of both companies. That means not only controlling shareholders, but also minority shareholders.

Thank you. At this time, I would like to turn the floor back over to the Company for any closing remarks.

To our colleagues and investors we end here our call related to 2008 fiscal year closed last April. Once again, we thank you very, very much for your presence and your continued interest and support to our Company. Bye-bye.