Cosan SA (CSAN) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Cosan's Fourth Quarter End-Year of 2012 Results Conference Call. Today with us, we have Mr. Marcos Marinho Lutz, Cosan's CEO; Mr. Marcelo Martins, Cosan's CFO and Investor Relations Officer, and Guilherme Machado, Head of IR.

(Operator Instructions)

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. After Cosan's remarks, there will be a question-and-answer session for industry analysts. At that time, further instructions will be given.

Should any participant need assistance during the call, please press star, then zero to reach the operator. The audio and slide show of this presentation are available through live webcast at www.cosan.com.br/ri. The slides can 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's management, and on information currently available to the company. They involve risk, 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, and could cause results to differ materially from those expressed in such forward-looking statements.

Now I'll turn the conference over to the CFO and Investor Relations Officer, Marcelo Martins. Mr. Martins, you may begin your conference call, sir.

Thank you. Good morning, everyone. I want to thank you for participating in our earnings release call. This is quite an important year for our company, as it was the first year that we consolidated our results, taking into consideration our 50% stake in Raizen Energia.

It was at the same time a very challenging year for Raizen, given the fact that the company operated in an adverse environment in the upstream business in the sugar and ethanol business, as we had a big disruption in the production of sugarcane production in the Central-South region of Brazil.

Despite that fact, Raizen Energia ended up delivering very good results in a very adverse scenario. And in addition to that, we had other news coming from our company related to the potential acquisition of (inaudible), in the last quarter of our fiscal year of 2012.

And more recently, we had the disclosure of the signature of our agreement with BG, with the purposes of buying, controlling stakes in Comgas, and also our association with Camil, contributing our Cosan food retail business to that company.

I'd like to start the call with our highlights for the year of 2012. Just wanted to remind you that in the year of 2011, we had the results of the company before the information of Raizen, which basically implies that we are not talking about -- we're not comparing companies with the same profile. As in 2012, we are consolidating 50% of Raizen. And in 2011, we consolidated 100% of Cosan's business in the upstream and downstream businesses.

So we had a positive variation in net revenue on a consolidated basis for Cosan of 32%, reaching BRL24.1 billion in revenues. A positive variation, or net income of 238%, reaching BRL2.6 billion. Out of this BRL2.6 billion, BRL2.2 billion refer to information of Raizen. And the gains coming from that contribution of assets into Raizen. And the balance has also been impacted by a negative variation in the exchange rate, in the reais exchange rate, compared to last year mainly.

So when we normalize or adjust the net income by these two factors, we will probably get to a net income of BRL800 million, which is substantially better than the normalized net income for the year of 2011.

In terms of our EBITDA, we reached BRL2.14 billion in 2012, with an EBITDA margin of 8.9% It represented a reduction compared to the year of 2011, but that occurred mainly considering that, you know, the portfolio was different, and therefore, the bases are not immediately comparable.

In any case, it's important to emphasize that these good results are very much in line with our guidance provided to the market, actually, at the top end of the range of the indicative EBITDA of the company that we provide to the market recently.

Now talking about the different business lines, starting with Raizen Energia. We saw a reduction in the sugarcane crushed of 2.4% from 54.2 to 52.9 million tons; a sugar production, 1.2% higher than last year at 3.97 million tons, compared to 3.92; and an ethanol reduction of 12.8%, from 2.2 to 1.9 billion liters.

The actual TSR or the HR, as we call it in Portuguese, also suffered a reduction of a 1.7%, coming from 138.5 kilos per ton, to 136.1 kilos per ton. The volume sold of Cogen went up by 19% to 1,500 megawatt hours. And average price increased from BRL148 to BRL158 per megawatt hour. In the condition level of the harvesting process has also reached its peak in the fiscal year of 2012 at 86%.

In terms of the financial performance of the company, which a jump of 13% in the net revenues from BRL6.4 billion to BRL7.2 billion, and the jump of 5% in EBITDA from BRL2.1 billion to BRL2.23 billion. The EBITDA margin got reduced from 33.4% to 30.8% in the year of 2012.

Now moving to the fuel distribution business, Raizen Combustiveis, we saw a big jump in the EBITDA of the company. But the volume did not increase a lot, which basically means that despite the fact that the volume sold was not higher, or substantially higher than last year's, we had a price dynamic that managed to provide better results for the company, especially considering the migration from ethanol to gasoline, and then mainly considering the fact that gasoline has better margins than ethanol.

Therefore, we had a volume of 21 billion liters sold in the year of 2012, net revenues of roughly BRL40 billion, and an EBITDA of BRL1.3 billion with a margin of 3.3%. The EBITDA per cubic meter for the fiscal year of 2012 was BRL62.4, almost BRL20 higher than our indication, or projections in the beginning of the fiscal year of BRL43.

And the adjusted EBITDA for cubic meter was up BRL70.5, which basically means that we had an adjustment of BRL15 million in the -- of non-recurring expenses during this last quarter as a function of certain reserves for the payment of variable compensation to the management that had not been incurred before. And the reason why we had this additional payment has to do with the fact that we -- the performance was much better than expected. And therefore, the bonuses went up as well.

Now moving to the companies that we consolidate 100%, which is the so-called controlled group of companies within Cosan. We had an increase in the volume loaded of 7.5 to 7.76 million tons; an increase in the average revenue from 60 to 74. The net revenues of the company went up by 28%, from 448 to 572, and EBITDA jumped from BRL146 million to BRL213 million, with a margin of 37.3%, up from 32.6% last year, representing a nominal increase of 46% in the EBITDA of the company last year.

Cosan Alimentos, 2012 was the last year we had consolidated Cosan Alimentos, as we have recently announced we will be contributing this business to Camil, forming a new food company where we will have 11.7%, which will be managed by the controlling shareholders of Camil.

So in 2012, even though we had a reduction in the volume sold in the domestic market, we had an increase in the average price, but also an increase in the average cost of the company, as a function of the increase in the price of sugar, which is used as an input for the production of refined sugar.

We had a jump in the net revenues of 7.3%, reaching BRL940 million, and a reduction in EBITDA of 8.3%, the function of this cost increase to BRL70 million, represented by an EBITDA margin of 7.4%.

So as far as the other business portfolios, we have the lubricants business, which also includes the sale of base oil, and the land lease that we provide to Raizen based on the portfolio of land that we currently have at Cosan. And as far as this company has the allocation of 100% of our corporate expenses in Cosan, which is something we didn't do in the past, and also, some contingencies related to the businesses that went -- contributed to Raizen, which liabilities remain with Cosan as remained with Shell as well.

So we had an increase in net revenues of 28.5% from 830 to BRL1.65 billion last year, and a reduction in EBITDA from BRL147 million to BRL49 million. Just want to emphasize that in the fiscal year of 2011, 100% of the EBITDA was related to the lubricants business. Since then we increased our revenues. We also integrated the lubricants business with the base oil business. And reduction in EBITDA has to do with all these other factors, or costs that have been allocated to this other business line in our company.

Talk a little bit about the net debt position of Cosan. We saw a reduction in the net debt of the company in the last quarter of 2012, compared to the third quarter of 2012, with oil reduction, mainly given the fact that the debt at Raizen level got reduced as well. And we basically saw also a reduction in our leverage ratio on a (inaudible) basis, which went down to 1.2 times, which is the lowest leverage of the company ever.

We will incur an additional debt for acquisition of Comgas, which will improve the capital structure of the company, and will also increase the leverage ratio of Cosan in this fiscal year. But we believe that we're going to have the change to deleverage our balance sheet quickly once we start generating cash from the businesses, and through dividend distribution coming from the companies that will form our portfolio from now on.

Now moving to the guidance. We have provided some guidance to the market now for the new crop year. We had net revenue last year of BRL24 billion. And we project BRL26 billion to BRL29 billion as for this coming year, with an EBITDA of BRL2.1 billion. And now we're projecting BRL2.2 to BRL2.5 billion, a compact of BRL2.1 billion last year, and we project BRL2.1 billion to BRL 2.4 billion for next year.

For Raizen Energia, we are forecasting a total crush of sugarcane from 52 million to 55 million tons, when we crushed 53 million tons last year. Sugar sold up 3.9 million to 4.2 million tons, compared to 3.97 million tons last year. The volume of ethanol sold, we expect to be between 1.85 billion to 2.05 billion liters. And the energy sold in this coming fiscal year, we believe to reach 1.65 thousand to 1.85 thousand megawatt hour.

EBITDA projected for Raizen Energia should be in the range of BRL2.2 billion to BRL2.5 billion, as we had the BRL2.235 billion of EBITDA last year. For Raizen Combustiveis, we projected the volumes sold to be between 21 billion and 23 billion liters, with an EBITDA of 1.3 to 1.5. Our EBITDA last year was BRL1.3 billion, and the volume sold reached 20.9 billion liters.

For Rumo we project a volume load between 8 million and 10 million tons, and an EBITDA of BRL260 million to BRL300 million. For the lubricants business, we project an EBITDA of BRL220 million to BRL260 million based on the current EBITDA of BRL205 million.

This is where we have to say, and this is pretty much the information we wanted to share with you. I'd like to turn it back to now for questions. Thank you.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). The first question we have comes from [Selina Merrill] of Credit Suisse. Please go ahead.

Hi. Thank you for taking my calls. I had a couple questions about the sugar and ethanol sector specifically. Can you give me your sort of current views on sugar prices in the market? What do you think are the drivers of this production in international prices that we're seeing now?

And then secondly, you know, given your guidance for slightly higher crushing volumes for next year, is this your expectation that overall the harvest in the Central-South is going to be a little higher? Or is this a result of your investment in CapEx and replanting and expanding your area after last year?

Selena, this is Marcos speaking. Well, first, we are a little different than the average, in terms of what we've done, in terms of investments. So we don't see improvement in production for this year on the Central-South of Brazil.

(Inaudible) this all varies with the rainfall regime and other variables, but mainly rain. So far, the weather has been good. But have to say that if you have, for instance, unexpected rainfalls in July, August, this might increase volumes, but might not actually increase, let's say, sugar volumes. Because you change a little bit the way the harvest goes.

In terms of price scenarios, we've been strongly -- I mean, all the commodities have been strongly affected by microeconomics. So this has also impacted sugar. And on the sugar case, we also had very strong crops on the northern hemisphere. So this was clearly a driver this year. Mainly Thailand, I would say.

Out of all the crops we've seen, the one that surprised me was Thailand. And Thailand is one that actually can keep on those levels for longer run. Besides that, I don't see a long run of, let's say, the world expanding much without Brazil, which is what we've seen those two years. Should get a longer series.

You'll see that due to the fact that Brazil has a large capacity for expansion with available land, et cetera, Brazil has been contributing at least half of the growth in, let's say, demand as a supplier. So for that reason, it's actually where comes my strong belief that on the medium-to-long run, prices should be at the level that justify investments in capacity increase in Brazil.

And this means in current dollar terms, probably close to $0.23 a pound. So that kind of our medium-to-long-term view. But obviously, the short term is tough to guess, because it's very impacted for other causes outside of the market.

So but as you think about this next coming harvest, do you have a new sort of expectation of international prices based on the recent movement in the last few months?

No. We have actually had roughly half of the next year -- this year's exports. Our current policy's actually not to hedge much. And this is not based on bearish or bullish view. But it's based on the fact that we believe on the long run, we should not carry large hedging positions.

We should not try to have hedging as -- we don't have hedging as a source of, let's say, bottom line. We have hedging as, let's say, stabilizer in our cash flows. And today, we don't need as much. So we have hedged half. The variation in dollar terms have been strong. But in real terms, had not been that strong, because the dollar-to-reais exchange rate changed a lot. So compensated a big part of what actually was the change in dollar terms for the sugar press.

Okay. Thank you very much.

The next question we have comes from Fernando Fererra of Merrill Lynch. Please go ahead.

Thanks. Good morning, everyone. I have two questions. First one, I'd like to understand a little bit better the guidance on the sugar and ethanol side. As we expect a flat crushing, and the prices in real terms, in local currency, they're sort of flat. Why are you expecting an EBITDA growth here? Are you expecting costs to go down, or is to expect those prices to rebound from current levels?

So far, we are at an average hedging price higher than we were at this point in time last year, which gives us enough room for an increase in our EBITDA, compared to last year. We could have a potential negative impact in the coming months, which should be compensated by a better efficiency, and an expansion in our crushing capacity to the replanting of (inaudible).

Okay. So you are expecting a portion of cost increase, of course, decline already in this harvest. Right?

Yes.

Okay. And then the second question, do you have a target for opening and conversion of gas stations at Raizen Combustiveis for this year?

How many stations we're going to open this year?

Yes.

We have the conversion as well.

We have a new station coming from the recent rebranding of [Mimi and Papa], which will take place as soon as fiscal year. And we have the additional conversion of the stations branded also. So in total, we should have around 400 stations, new stations. 400 new stations, yes.

Thank you.

Again, as a reminder, if you would like to participate in today's Q&A, please press star, then 1 on a touchtone phone. Again, that's star, then 1 to ask a question. Again, we'll pause momentarily to assemble our roster.

Again, as a reminder, if you would like to ask a question, please press star, then 1.

The next question we have comes from Pedro Herrera of HSBC.

Hi. Good morning. Good morning, gentlemen. A quick question regarding, can you give us an update on the status on the [restriction] of the shares of CZZ with the [C73] shares? Where is that? What do you expect in terms of timing, and what exactly is it that it's left to be done?

The big objective is to do the collapsing of CZZ into Cosan. It's up to the controlling shareholder to decide the timing to do it. He's been in conversation with other partners, other shareholders of the company with the purpose of (inaudible) some sort of agreement to increase his voting power once the collapse takes place.

What I can tell, I'm not taking part of this conversation. I can tell is that as far as I'm concerned, they're making good progress. And the objective is still to do it.

Okay. Thank you.

The next question we have comes from [Martin Tabia] of Raymond James.

My question has already been answered. But I have doubt on the CapEx. I don't understand in terms of CapEx. What do you expect for 2012 this year?

Yes. For this new fiscal year 2012, 2014, we're working with -- sorry, 2012, 2013 -- we're working with a range between BRL2.1 and BRL2.4 billion. It's in our letter in the Webcast presentation, out of which 60% of this CapEx should be related to the sugar and ethanol business, which is under Raizen Energia.

Okay. Thank you very much.

(Operator Instructions). It appears that we have no further questions at this time. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Gentlemen?

Well, thank you all for participating in our call. We're very pleased with the performance of our different businesses in a very challenging year for our company. I think it shows not only the resilience of our business portfolio, but profits of building a very strong, you know, business under Cosan, especially in adverse scenarios, like the one in the upstream business.

We managed to deliver very good results, and we believe it's going to be the case moving forward. Therefore, thank you very much for your support. And we'll talk to you soon. Thank you.

And we thank you, sir, and to the rest of management for your time. The conference is now concluded. We thank you all for attending today's presentation. At this time, you may disconnect your lines. Thank you all, and take care.