Cosan SA (CSAN) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Cosan Limited and Cosan SA's third quarter of 2010 results conference call. Today with us we have Mr. Marcos Lutz, CEO, Julio Fontana, CEO of Rumo Logistica, Mr. Marcelo Martins, CFO and Investor Relations Officer, and Felipe Jansen, Head of IR. We would like to inform you that this event is being recorded and all participants will be in listen-only mode during the Company's presentation. After Cosan Limited and Cosan SA's remarks there will be a question and answer session for industry analysts. At that time further instructions will be given. (Operator Instructions). The audio and slide show for this presentation are available through the live webcast at www.cosan.com.br/ri. The slides can also be downloaded from the webcast platform.

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 Limited and Cosan SA's management and on information currently available to the Company. They involve risks, uncertainties, and assumptions because they relate to the 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 Limited and Cosan SA and could cause results to differ materially from those expressed in such forward-looking statements. Now I'll turn the conference over to CFO and Investor Relations Officer, Marcelo Martins. Mr. Martins, you may begin your conference.

Thanks. Good morning, everyone, and thanks for attending our quarterly conference call. As we approach the end of our fiscal year, it's important to talk a little bit about the factors that have impacted our results during this year. Even though we're going to keep focusing on the comparison between the last quarter or the quarter in question here, which is the third quarter of 2011 with the same quarter last year, there are some specific points that I would like to highlight now, starting with the fact that we had an increase in our sugar production, year-to-date of roughly 400,000 tons, which represent s an increase of 12% over the nine months of the previous year.

That actually means that we had a better production than last year, but not necessarily a better production than when we had projected. Actually, we had a pretty disappointing sugar production this year compared to where we thought we would be. And the main reason for that is the fact that we had a much lower crop than we had anticipated. The reason why we had a lower crop has to do with the climate conditions, mainly in the Center-South states of Brazil and mainly in the State of Sao Paulo, where we have the bulk of our mills in the country.

In terms of our sugarcane crushed, we had a reduction of 21% compared to this quarter last year, coming down from 14.2 million tons to 11.3 million tons in the quarter. The sugar production also came down by 14%, coming from 936,000 tons in this quarter last year to 809,000 tons in this quarter. Ethanol production reduced 14.5% from 531,000 to 454,000 tons during this quarter.

The TSR actually ended up offsetting part of the reduction in the crushing as we had an increase from 126.6 kilo per ton to 138.5 kilo per ton in this quarter. Overall, our sugar production was 500,000 tons shorter than we had budgeted for this fiscal year -- for this crop year. We had originally projected a total sugar production of 4.5 million tons and we ended up with four million tons over the last nine months.

In terms of our mechanization, as you know, as part of our agreement with the government of the State of Sao Paulo, we have reached 78% of mechanized harvesting in the state and we're on track to reach the target agreed with the state government. I would like to talk a little bit about the highlights, the financial highlights of the Company for this quarter. And we had an increase of 25% in our net revenues coming from BRL3.8 billion to BRL4.7 billion we saw in this quarter. And we had a reduction in EBITDA from BRL490 million to BRL410 million in this quarter.

It's important to notice that last year we had a non-recurring impact coming from refinancing of our tax liabilities, which resulted in a BRL212 million of an increase in our EBITDA. If we take that BRL212 million into consideration and we reduce it from last year's EBITDA, we will see that there was an actual increase in our EBITDA of 47%.

I think that the most relevant piece of news we have for this quarter comes from the fact that we had 45% of our EBITDA coming from our downstream, our logistics, and our cogeneration businesses, which actually confirms the decision to have a more stable flow moving forward, which resulted in the acquisition two years ago of the downstream assets from Exxon Mobil in Brazil. Since then, a lot happened. We started to ramp up our logistics in our Cogen business and we're already starting to see the good results coming from these two businesses as well.

In terms of the sugar and ethanol business only, we had an increase in net revenues of 47% from BRL1.1 billion to BRL1.68 billion in this quarter and a drop in EBITDA from BRL416 million to BRL275 million. If we deduct from this number the same BRL212 million resulting from the tax of refinancing of last year, we will see an increase of 35% in our EBITDA, meaning we're jumping from BRL204 million to BRL275 million in this quarter.

We had a much higher volume sold than the equivalent quarter of last year, a 25% increase in our sugar export and 116% in our ethanol domestic sales. In terms of prices, we had an increase of 7.5% in the case of sugar and 16% in the case of ethanol. We decided to prepare a bridge that shows -- that provides a better comparison between the EBITDA of this quarter with the EBITDA of the same quarter of the previous year.

So if we take into consideration the impact coming from the origination of sugar, which actually means that sugar we had to buy in the market to replace the reduction in the production we had, we had a negative impact of BRL49 million during this quarter. If we add to that number the impact coming from the sugar that was not produced and not originated as well, that impact is equivalent to BRL49 million as well.

And if you take into consideration an increase in the cost of production resulting from the fact that we had a lower production, that number would result an impact -- of an impact of BRL38 million. These three factors added up would have represented a better EBITDA, which could have resulted in BRL411 million during this quarter. If we add to that number the impact coming from the hedge accounting, which was not contemplated in this quarter of the previous year, we're talking about a potential increase of BRL85 million.

Therefore, had we not have a lower crop in this quarter and had we not have the impact of the hedge account on the EBITDA, as you probably recall it in the past, the impact of the hedge was below the EBITDA line. We would have had a better EBITDA equivalent to BRL496 million, with a margin of 25% as opposed to 16% in this third quarter of the year.

Overall, the fact that had a lower production impacted the performance of Rumo in terms of the volume of sugar loaded at the port, even though that had a negative impact, the net revenues of the Company increased by 218%. The net revenue per ton also increased from BRL16 to BRL68 per ton, even though the volume came down from 2.2 million tons to 1.7 million tons lower than at the port compared to last year. The EBITDA also jumped 540% as we have predicted and the EBITDA margin went up from 16.4% to 33.2%.

In terms of our downstream business, we had a very good quarter, better than anticipated and better than we had projected, where the volumes went up from 1.5 billion liters to 1.64 billion liters during the quarter, representing an increase of 10%. The EBITDA jumped 43% from BRL68.7 million to BRL98.1 million, representing a margin of 3.2% compared to 2.5% last year in the same quarter. The EBITDA per cubic meter also increased, jumping 30% from BRL46.1 to BRL60 during this quarter.

I would like to talk a little bit about our hedging strategy. We have still 680,000 tons of sugar hedged for this crop year at a price of US$23.15. And when we adjust this price by the current FX rate, this number goes up to US$24.06 per pound. For the next crop, we have 1.5 million tons hedged already, representing -- represented by a price of US$20.06. Adjusted by the FX rate would be equivalent to US$23.05 per pound.

In terms of our net debt position, we had an increase of BRL1 billion compared to last year. This was a projected increase, considering that we keep investing Rumo and in the Cogen business as well. And at the same time, we had an increase in our margins being deposited as a function of our hedging policy. And also a debt rate in the amount of US$300 million, as you probably recalled, through a bond issuance, a professional bond issuance that took place last year. So overall, our net debt position jumped from BRL4.7 billion last quarter to BRL5.3 billion in this quarter, representing a net debt EBITDA ratio of 2.48 times.

We had a record cash generation during this quarter, which represented a net cash position of BRL1.1 billion at the end of the quarter. If we add to that number the margin -- the cash margins being deposited, we would increase that cash position by BRL276 million, which would make up to BRL1.4 billion of the cash position at the end of the quarter.

Having said that, we have also changed our guidance for some specific items. The first one is the loading volume at Rumo, which we have moved from nine to 11 million tons to 7.5 to 8.6 -- to 8.5 million tons as a result of a lower crop in the central south region overall. On the other hand, we have increased our volume of lubes sold from 1.4 to -- 140 million liters to 160 million liters to 150 million liters to 170 million liters, just to remind you that this is the best business we have in our portfolio in terms of EBITDA margins today which, at the end of the day, ended up impacting the EBITDA of the Company, not to the point that we will change the lower end of the range, which still remains at BLR2 billion for this fiscal year, but to reduce the upper end of the range, which came down from BLR2.4 billion to an actual BRL2.2 billion for this crop year.

Well, we decided to shorten the time of the presentation to give you more time for questions. We have here today Julio Fontana, who is Rumo's president, and Marco Lutz, as well. And we're ready to answer your questions. Thank you very much.

(Operator Instructions). Your first question comes from Fernando Ferreira of Bank of America.

Hi, everyone. Thanks for the call. Marcelo, I think the reasons for the weaker results were well explained by you, but if you can help me understand more why this weaker volumes are now going to spill over for the next quarter? That would be my first question.

Marcos is saying here. Basically, the adjustments for a lower number for the whole crop was done in the last quarter of -- on this last quarter. Why is that? Because we knew already the volume crush for that crop. So all the adjustments you have to do, adjusting in the unitary costs that were before projected to divide -- be divided by a larger number of tons crushed were adjusted already and they already impacted December and therefore is already in the results. For the next three months, therefore, we won't have any adjustment in terms of crop. We might have adjustments in terms of price that can be up or down and applied to the cane bought throughout the year. But this won't be as close as the adjustments. Positive or negative, this won't be as close to the size of the adjustments done in December and November.

Okay. Thanks, Marcos. But we can assume that the weaker volumes that are not enabling you guys to get better pricing out the spot market will continue, right?

Well, yes. At the end, we will have the inventory level you've seen, so we have, from now on, not much to be originated, almost nothing to be originated. And we have the pricings which is the average of the size that is already priced as December 31st and market prices, which is a balance.

Okay. Thanks for that. My second question would be related to the joint venture. I understand that you said, in the Portuguese call that you expect to announce new numbers and probably some synergies already in the next few weeks. So my question would be related to your acquisition strategy after the joint venture is put in place. Would you be looking into new and/or different business that -- because that is not in right now as part of your new M&A targets or not necessarily? Your core will remain on the business because it is right now.

I assume that you're asking that question related to the businesses they are not being contributed to the JV, right?

Yes.

Okay. So as we always made clear to the market our plan to expand the portfolio outside of the JV. But that doesn't mean we're going to enter new business. That actually means that we will try to optimize the performance of the businesses we have today, which means that we'll keep investing Rumo and in the transportation business. We're keeping that in the retail business and try to create value through adding other products to our portfolio and average our distribution network and then the brand as well. And that's the idea at this point in time. So we're not planning entering into other businesses, but actually maximizing the performance and the results and the potential of the business we're in today.

Okay. Thanks, Marcelo.

(Operator Instructions). The next question is from Paula Kovarsky of Itau.

Hi. Good morning, everyone. Actually, I would like to make two questions. One on the CCL's business. We see a reasonable expansion of the EBITDA per cubic meter margin when you compare it on a yearly basis. And I would like to understand how much of this comes from the lubricants business and how much of this would be from the food distribution business? The question is actually from the fact that since you are increasing the share of diesel in your mix, I would expect the foods business margin to be more or less stable as opposed to the lubricants, which grew significantly.

And you keep on talking about moving into more value-added products. So I would just like to understand what are the main reasons for this increase. And then comparing on a quarterly basis, the impression is, among the industry, that the previous quarter was hardly affected by the volatility of ethanol prices. So I would like to understand if this is gone in this quarter or if there're still something to hurt margins going forward?

Paula, it's Marcos. I would say that there's a big portion of the contribution in a per cubic meter basis that is actually an improvement on the fuels business, which, I would say, are related to one, the ethanol margins that were hurting a lot in the past are now more stable. The second one is a larger mix of gasoline versus ethanol due to the prices of ethanol being higher. So we see today pretty much ethanol consumption being more focused in the Sao Paulo state and a lot of other states that used to have a very favorable pricing for ethanol are now converted to gasoline, where we actually collect higher margins.

Yes, we did increase our share in diesel and indirectly [over] diesel as well, but in a very selected way. So this is not hurting much our overall margins. So the benefit of more gasoline, premium gasoline as well and better margins in the ethanol are the new ones on the fuel side. And obviously on the lubricants side, the margins are stable, but the volume of lubricants increase. So you have the combination of both.

Regarding your question on volatility and seeing prices going forward, I think the scenario's pretty positive, given that you have more cars sold in Brazil and less ethanol to be produced next crop. So in theory, we will have a very firm price of ethanol next year which will bring a better mix of gasoline for next year and also less volatility given that the production side -- the producers will be more relaxed about selling the inventory, given the higher prices and the fact that nobody will be worried too much of not being able to sell the whole production mix throughout the year.

So I don't see things like, in the past, where we see people selling as they produce, therefore, putting a big pressure in the crop months versus a shortage of -- possible shortage in the crop this year. I will expect a more stable price of ethanol throughout the year. So this will bring, for sure, a better mix, more gasoline being sold next year. And probably more, let's say -- more close to projections in what we sell in ethanol, given that their volatility will be smaller.

Okay. But, sorry. If you compare, on a yearly basis and when you look at the (inaudible) per cubic meter or even the absolute number, there seems to be not much of a reduction there. So is it correct to understand that most of the efforts that were originally announced as kind of savings on the [AS] operations are kind of parked to the point you have the JV, which also we will probably see those gains coming out -- coming in next quarters. Is that right?

Not necessarily, Paula. Because you have a big positive impact already on the margins of ethanol that are a big portion of this type of synergies was our ability to buy better. And we did generate a quite sizable amount of money on what we call supply and distribution and trading, buying the ethanol a lot better. So we actually did perform well on that line.

On the SG&A, what we are doing is we are increasing a lot our C&F, so we are in a very -- we are steadily and consistently moving to control more the transportation chain. So this will bring in our only [target] basis more costs to my SG&A. But I'm capturing this as well on the revenue, so this is one of the explanations for the improved margins as well. So in the past, the SG&As were lower, but I was doing less things. So I was selling almost 100% FOB, and I'm now selling almost 50% FOB and 50% C&F.

Okay. Another question on -- I understood from the other call that this decision from the [Cardi] on the sale of the aviation business to Shell has nothing necessarily to do with any approval related to the JV. But my question is maybe a bit more fundamental on the reason behind doing that and if this could eventually evolve to other -- to putting in sort of contingents on the approval of -- from Cardi on the food distribution. It doesn't seem to make much sense to see Cardi asking sell the Shell airports if it doesn't do the same to the next competitor, which is Petrobras, because probably they are even more concentrated or have a larger market share.

So do you see this as any sort of shift in attitude from the Cardi that could eventually bring any concerns on the approval of the Shell Cosan JV in the food business distribution, in particular? And the other question is can they come back with -- one idea is they did for the quarter deal, for instance, where they approved the joint venture, but asking for all of the decisions and the movements to be possible to be reverted until they have a final decision. Do you see any risk like this or is this completely out of the game?

Paula, let me -- I would not comment much on this Shell aviation thing, given that this is something they are conducting and it is related to a deal done like couple of years ago. I will comment, though, on the law of the Brazilian system of antitrust and competition authorities. At the moment you actually file your concentration acts, 15 days after the signature of the binding documents, the SEDs, so the Secretary of Economic Defense, will basically say to you what they did in the quarters or even what they actually did on the Ipiranga deal, on the one, when actually, Petrobras bought Ipiranga north and northeast. They did, at that time, a -- what they call -- they had to keep all the assets and good yields --

And accounts, yes.

-- reversible. So they have remembered that company called -- I forgot the name of -- Ipiranga of the North. You probably remember better than I do -- awful -- it was awful. And they kept that separated, still run by one company, but this was already future Petrobras, but it could be reversed. This did not happen in our deal. This cannot happen anymore.

So now what the Cardi will do is they will analyze our deal and will say a decision at the end. And on that area, I'm pretty confident, given that we have a very -- two very strong -- very close-by, similar concentration acts, which was the purchase of Petrobras, of the Ipiranga North and Northeast, and the purchase of the shocker by ultra group an Ipiranga chain.

So in those two cases, what was ruled at the end was very similar and this is what we expect to our case, given that those suitcase are larger than our concentration in one deal. The aviation one is a complete different one, in a complete different scenario -- in a -- conducted by a company that is not us. So I don't want to comment much on that and I don't see much or I don't see any spill of that case to the Shell Cosan JV.

Okay. Thank you very much.

(Operator Instructions). The next question is from Debbie Babovnikova of JPMorgan.

Hi. Good morning. So I just wanted to go back to the extraordinary items that we saw this quarter and thank you for providing all that color at the beginning of the call. But I wanted to go back and see if you can help us kind of get to a number, maybe on a per pound basis for sugar as to what your costs would have been, excluding all the one-offs. And in this case, both on the production costs and also on SG&A. Kind of what would be your cash breakeven on sugar without any of these one-off events?

Debbie, I'm going to ask you to give me one second, please.

Okay.

(Operator Instructions)

Debbie, while we're still -- we're making some calculations here, do you have any other questions or can I move to the next ...

Yes, no.

Can we call back to you?

I -- okay. Let me -- so, the next question is actually related to that because I wanted to ask what do you think is the price that needs to -- that we need to see in the market to really motivate more investments and capacity in Brazil? And also, do you have any view on the market for this upcoming season in terms of the broader market? Do you think that we're going to see a significant increase in supply? Do you think that weather will continue to be a limiting factor? Just any color on your outlook for the upcoming season for the broader Brazilian market would be great.

Okay. Debbie, again, try to answer your question here. What we see is Brazil for next year producing something very similar of the production this year, obviously subject to weather. A very, very positive weather or rainy weather will increase the amount of cane to be crushed. But in the other hand, will decrease the concentration of sugar on the cane that needs crushed. So in terms of production, we probably will see a production in line of this year -- well with this year. Not much different.

In terms of price, I would say that the current prices are already incentivizing production expansion. I see, on the other hand, the producers in Brazil are very skeptical about increasing production because, obviously, the spot price is good. But when you look forward and you have to look three years forward, your future production of a greenfield or something like that, this is not very appealing. So I would tell that I see Brazil for sure getting back to the 600 -- 600 and something number of crushing in the center south which is kind of the current capacity at full speed on the cane side. So people will plant cane and will increase production in a couple of years.

For further expansions in greenfields, pretty much -- the most majority of the companies that did greenfield expansion entered financial stress. So I see people very skeptical about doing this and I probably won't expect small players doubling capacity as we saw some years ago. So we do see a tight market moving forward. We do see the ethanol market in Brazil quite tight because the current prices do not justify expansion at all and actually justify conversion from ethanol to sugar when I will expect production -- extra production of sugar in the short term.

And we see the car market in Brazil very strong. So we see record sales of cars all the time, dominance of the factory of vehicles in Brazil, absolutely consolidated. So the ethanol market in Brazil will be very tight and very -- less volatile because they will be pretty much -- touch the ceiling of the gasoline prices all the time throughout the year. Something more you want me to address?

No, that's helpful. I actually just wanted to follow-up on what you said about prices --

Sure.

-- three years out. Just looking at the forward curve, 2013. We're looking still at prices of about US$0.20, US$0.21. Do you think that's not enough to motivate new greenfields?

I don't think this is enough to motivate greenfields because again, this is an indication. So it's not a price that gives you some crushing. And obviously, you have to get there -- the prices when you get there can be different. Inflation can kick in and things like that. So what is motivating is something like 30% internal rate of return, 25% or something like that. And this does not give that amount of money. I see Marcelo has the answer.

Yes. Had we not had the negative impact on the crop there be -- our costs would have dropped 20% to roughly US$0.15 per pound.

SG&A?

I'm sorry -- our -- and you want know the SG&A?

Yes, the total cash flow.

Yes, yes. Yes.

Your cost is US$0.15 per pound including SG&A on a normalized basis.

Yes, US$0.15.

That would -- a US$0.20 per pound sugar price would seem pretty attractive on a long-term basis for expanding capacity.

On a long-term basis, if you have, for instance, 10 years of that price for sure -- five years of that price for sure, but if you've got one month when you start producing, but with a downward curve, this is not attractive then.

And then, just one last quick question-- just, you mention in your press release right that -- and you mentioned again on the call, 45% of your EBITDA is basically now generated outside of the sugar and ethanol business. And you're including within that, the cogeneration business. And just working backwards to a number for cogeneration EBITDA from that kind of guidance, am I right to assume that you had somewhere close to about BRL49 million in EBITDA for cogeneration?

Yes. Yes. Which is equivalent to 90% of an EBITDA margin.

Okay.

63% is total revenues. 49% is -- 48% to 49% is the EBITDA.

Okay. Perfect. Great. That was it. Thank you.

Sure.

The next question is from Matthew Farwell of Imperial Capital.

Hi. Good morning. Just to continue the discussion on the sugar outlook, ending stocks have been around BRL30 million globally for the last few years. Do you have an opinion on what level of ending stocks might ultimately bring the sugar price down or how producers or potential investors are looking at the market?

This -- any stock figures is being -- changing a lot recently. Because what we are -- this -- currently seeing is a big fight between buyers and sellers. The buyers of sugar in the world are kind of waiting to buy sugar. You see Brazil with a lot of sugar, but very little movement or little activity in the ports. And we obviously are expecting for March a pickup of that activity. But depending on those levels, people can get very close to [strengthen] today. The systems are a lot more efficient, I would say, in terms of moving products worldwide.

Again, we saw also in India changing a lot this number because if you discount India from the world inventory, somehow you change a little bit the world figure. At the end, one of the biggest drivers of this variation in the last five years. And I will tell -- my gut feeling is the world will need at least six months of inventory to be -- supplied and we are close to that. So I see more -- the market reacting to the weather issues and the numbers of production for next year is coming from Brazil and stuff like that to be [stipe] or to be, let's say, bullish on the sugar market.

Interesting. Another question on Rumo. Could you discuss the growth outlook for that business? You're loading volume guidance is down. What is the outlook for transportation volumes next year and in future years?

We have -- we been, obviously, when the crops in Brazil was reduced, the volume that Rumo would be capturing was reduced as well because you have to remember that Rumo is the growth player out of the three ports. So obviously, given that you are growing, you are kind of skimming what is exceeding the other capacity. And when you have a reduction on that -- on the elevation side, this hurts you more than your competition or when you are in the growth. What we have been focusing and very successfully is, given that we have lower volumes, we focused in improved our revenues per ton.

So what we've been doing is dedicating our fleet and our assets to bring products from further and, in a big percentage, from our elevation total. So for this year, we will be probably projecting -- growing for next year almost 50% the transportation. It doesn't matter what I do [elevate] because this is more related to my capacity and my, let's say, ability to handle those volumes on our railcars and locomotives.

Yes. Okay. Thank you very much for answering my question.

At this time, there are no further questions. I would now like to hand the floor back to Mr. Marcelo Martins for any closing remarks.

Okay. Well, thanks again for participating in our call. This will wrap it up, but what we would like to say is that even though we had a disappointing quarter in terms of our end results as we had expected more from a year -- with this sort of prices of sugar, we were very positively impressed with the good performance of our businesses. We have anticipated a good quarter for the downstream and Rumo as well. But our actual results exceeded our expectations.

So that actually confirms our strategy to keep focusing on business with a more stable source of cash flow to offset the volatility of the sugar and ethanol business. And that, obviously, emphasizes once more the strategic need to have a partner like Shell in our joint venture, which will increase even farther the stable portion of our cash flow generation. Again, thanks for your presence and we'll keep in touch. Bye-bye.

Thank you. This concludes today's conference. You may now disconnect.