Cosan SA (CSAN) 2013 Q1 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 First Quarter of the Fiscal Year of 2013 Results Conference Call. Today with us, we have Mr. Marcos Marinho Lutz, Cosan's CEO; and Mr. Guilherme Machado, Head of IR.

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 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 of this presentation are available through live webcast at www.cosan.com.br/ir. 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 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 result 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 the Head of IR, Guilherme Machado. Mr. Machado, you may begin your conference.

Thank you. Good morning. I'd like to thank you all for joining our conference call for the results of first quarter of fiscal year 2013. And I would like to start highlighting that in this fiscal year due to the signatures of an agreement with Grupo Camil, we are not going to show Cosan Limited as a separated business unit.

And particularly for this quarter, we are going to show its results in our financial statement as discontinued business. And as for the next quarters and moving ahead, we are going only to recognize our stake of 11.72% in Camil after the contribution of Cosan Limited's business.

I would like to start talking about consolidated results. In this quarter, we had the positive variation of 18.1% in our net revenues, mainly due to the increase in the revenues of Raizen Combustiveis, our fuel distribution segment. And that's jumped from BRL5.2 billion of net revenue in first Q '12 to BRL6.1 billion in first Q '13.

Just to remember that, we do the proportional consolidation of 50% of both Raizen Combustiveis and Raizen Energia in our figures, and a 100% of Rumo and the Other Business segment. Talking about the EBITDA, we had a negative impact of 15.1% in our figures from BRL502 million in first Q '12, moving to BRL427 million roughly in first Q '13.

This is mainly due to the impact of the delay in the beginning of the crop season in the results of Raizen Energia that crushed almost 40% less sugarcane compared to the previous year, and it reflects the delay in the beginning of the crop season.

It's important to highlight and to make it clear that we do not believe in the disruption of a crop season as we observed in the last fiscal year. We do believe in the fiscal year that has been delayed due to the climate conditions in this fiscal year 2013.

Moving ahead and talking about the net income, we had a net income that had a negative impact of 110%, jumping from BRL167 million in the first Q '12 compared to a net loss in this first quarter 2013 of BRL17 million. And this is mainly due to a negative impact of the exchange variation, which is a non-cash effect that impacted our results.

And we did an exercise to adjust these effects in order to offset the exchange variation effect, as well the result of sales of asset in both quarters. And the reduction in this exercise shows that we had a negative impact of 36%, which again it mainly related to the delay in the beginning of the harvest in this crop season, fiscal year 2013.

Moving to Raizen Combustiveis, which is the fuel distribution business that we jointly control with Shell. We had an increase in the volume of fuel sold in fiscal year 2013 of roughly 5%, jumping from 5.1 billion liters sold in first quarter '12 to 5.3 billion liters of fuel sold in this quarter.

And the net revenues increased roughly 6%, jumping from BRL9.7 billion to BRL10.3 billion, mainly due to the higher volume sold in both gasoline and diesel, which are the products that have higher unit margins compared to the other products.

Talking about the EBITDA, we had a significant increase in the EBITDA of roughly 19%, jumping from BRL310 million in this fiscal year to BRL367 million in first quarter 2013, with margins jumping from 3.2% to 3.6%, which represents an EBITDA in reais per cubic meter of BRL69, a significant increase of roughly 13% mainly due to the better mix of products sold in our network and the higher penetration of Shell brand as we move forward in the conversion of ISO branded certifications that used to belong to Cosan [Industria].

In Raizen Energia, which is the business that accounts for the sugar, ethanol and energy cogeneration production, that we also control jointly with Shell. Talking about the operational performance, as we have already mentioned, it was mainly impacted by climate effects that represented drought during inter-harvest period where we expect the growth from the sugarcane fields, and also the rains during the beginning of the harvesting process that caused the delay in the beginning of the crop season.

That used to start in the end of April and we have started effectively in the first quarter of May. So we have a negative impact in the crushing, in the sugarcane crushed of roughly 40%, reaching 11 million tonnes of sugarcane crushed compared to 18 million tonnes crushed in the previous quarter.

And the sugar production percentage also decrease of roughly 46%, reaching 643,000 tonnes produced in the period. And also the ethanol production recognized a decrease of 44%, reaching 350 million liters produced in this quarter. At TSR, the total sugar recovered in the sugarcane, also called ATR in Portuguese, perceived a decrease of roughly 4%, reaching 120 kilos of sugar per tonne.

And the volume of energy produced in the comparison of the quarters remained roughly stable, mainly due to the investments that we had made in the past years to increase the capacity of energy production in our side. So we have produced 424,000 megawatt in this quarter with an average price of BRL167 per megawatt hour.

The financial performance of Raizen Energia, the delay of the crop season also is reflected in financial figures. So we had a decrease of 22.8% in the net revenues, reaching BRL1.3 billion in this first quarter 2013 compared to BRL1.6 billion in the previous quarter.

And EBITDA decreased roughly in the same proportion of 21%, reaching BRL323 million with margins of 25.6%. Talking about our hedge position, on June 30, 2012, we were 74% hedged for our total sugar production to be exported of 2.8 million tonnes of sugar at an average price of 22.9 [cents dollar per pound] with an FX of BRL1.92.

We have already started to hedge part of our production for the next crop season. So we are -- at this moment, figure of May 30, we were hedged 14% for the same volume expected to be sold of 2.8 million tonnes of sugar at a price of 21.6 cents dollar per pound, with an FX on average of BRL2.2.

Moving to the business that Cosan controls 100%, and talking about Rumo. In the operational figure, we have also decreased roughly 32% in the total volume loaded in the port due to the delay in the production of sugar in the Center South of Brazil, with an average unit revenue of BRL69 per ton loaded.

In the net revenues, we also had a negative impact of 25.6%, reaching BRL105 million in this quarter compared to BRL141 million in the previous quarter. In terms of EBITDA, we had a decrease of 21%, reaching BRL43 million in this quarter compared to BRL54.3 million in the first quarter of 2012, with an EBITDA margin of 41%.

Moving to the Other Business segment, which accounts for the lubricants and specialties, and also the base oil, as well the lease of lands and contingencies related to the business contributed to Raizen, and the corporate structures of Cosan regardless Raizen obviously.

We had a net revenue that increased 31.6%, reaching BRL317 million compared to BRL241 million in the previous quarter, mainly due to the increase of the lubricant and base oil volumes sold in this period, and also the increase of 2% of the distribution of lubricants in the operations of Bolivia, Uruguay and Paraguay recently acquired.

EBITDA jumped from BRL27 million in first quarter 2012 to BRL38 million in first quarter 2013, an increase of 42.2% and the margins reached 12% in this segment.

Moving to our indebtedness position, we had an increase in our net debt position from the fourth quarter of 2012 to this first quarter of 2013 of roughly BRL900 million. We had a net debt of BRL3.9 billion compared to BRL3.1 billion in the previous quarter, an increase of 28%. And our debt is 59% denominated in reais and 41% U.S. dollar denominated.

And talking about our maturities, 23% of our debt is positioned in short-term and 77% is positioned in the long-term. So the most important figures in the increase of the debt is compounded by the debt that we have acquired to complete the acquisition of Comma Oil & Chemicals in the U.K., the lubricant business that we recently acquired from ExxonMobil.

The increase of [indebtedness] of Raizen's debt reconsolidated proportion is [13%], mainly BNDES lines and trade finance lines. And also debt exchange variation has impacted the U.S. dollar denominated debts roughly BRL400 million.

So if we do the calculations of our net debt position to the EBITDA for the last 12 months, we have a leverage position of 1.7 times, and considering the capital subscription that Shell has to do in Raizen and we consolidated 50%.

I think it's important to highlight that for the last annual shareholders meeting, we have approved the dividend payments of BRL250 million for the fiscal year ended in March 31, and they'll be paid in this fiscal year.

So for the last, our guidance. We would like to reinforce that we have unchanged figures that were released in the fourth quarter of 2012. That shows that the Company is quite confident that all the figures will be delivered with our most efforts in all the different business lines that we operate.

And I would like to conclude my presentation here and revert to you for Q&A section. Thank you all.

(Operator Instructions) Fernando Ferreira, BofA Merrill Lynch.

Thank you and good morning, everyone. I have two questions; first on Rumo. When we compared in this quarter the revenues from transportation and also from the port, they're very different. Was there -- and also the yields increased in this quarter. Was there any adjustment on the take or pay or did you receive any extra take or pay revenues in this quarter from your contract with ALL?

Yes. We actually receive pretty every month some adjustment. So at the end the way that the contract works is we do a program, and after that -- after the market is concluded, we check if any, let's say, difference is due to the ALL service or our service.

For instance, we take too long to unload the train, this is kind of our fault versus them not bringing empty train when scheduled is their fault or having -- taking too long to get to Santos is their fault. So we do that. And this has been kind of every month. I think throughout this year, we'll still have that.

I mean, till we have all the investments done, so the duplication from [Sumaye] all the way to Santos when this is ready -- and this should be ready at the end of the year -- till that time, I think we will have that adjustment towards us, so we'll be receiving that for a while.

Sure. And are you able to quantify how much you had in this quarter or not?

No. I think this is not a relevant number for an investor of Cosan. And I think this, at the end, is paying the difference that I will be making doing the service as scheduled and contracted. So this is not relevant on your side. You should see those fines basically recomposing the profits that we'll be having at the service we'll be provided. So this would not change anything.

Okay, thank you. And the second question is on the margins on the fuel distribution side. Just help me understand your guidance here. If I look at the highest EBITDA with the lowest volume and the opposite as well, we get to a range of BRL56 to BRL71. But if I use the lowest EBITDA and the lowest volume and the highest EBITDA and the [trigger] volume, I get to a range of BRL62 to BRL65, right, and you reported BRL69 in this quarter.

So what range you're actually thinking for the year which makes sense? And do you think that margins will trend from here or you expect pretty much the same at the same level going forward?

Again, as I mentioned, we -- the main drivers are mix. So obviously when you have a market that allows you to show a better mix, which means more [aviation] fuel, more high-end or premium fuel. So we launched a premium diesel fuel and we are expanding this with our gasoline fuel at the whole chain.

And this is done in a very structured and successful way. So this is a driver. So this is kind of continual. The other driver, I would say, is the mix of ethanol versus gasoline that you know that like last year we are again repeating a year where gasoline is more predominant in most of the states, and will actually bring us to a better level of margin.

So again, we are kind of optimistic. I would say that we are probably going more to the ceiling of the guidance than to the bottom. But it's too early in the year to say that we'll be actually through the roof on the guidance.

Okay. Thanks Marcos.

Selina Merrill, Credit Suisse.

Hi, good morning and thank you for taking the question. I just had a question on the sugarcane harvest and wanted to know if you could provide an update on how the weather is looking now, and have you caught up on the crushing volume after the delay in starts or is that something you expect to see in the next few months? Thank you.

Well, I think first thing is it's important to explain, when we say delay in harvest, this is not really because we were actually delaying as a -- as normally delays happen for, when nothing is ready and stuff like that. The delay is due to the fact that we had a larger crushing capacity than we have canes to crush.

And because we have an agricultural yield that peaks in the middle of the year when the weather is dryer and is colder, so the concentration of sucrose in the cane actually goes up. You want to crush ideally everything in one month in terms of agricultural yield. So when you have more crushing capacity than cane, you concentrate your crop.

So we have been crushing in the good days close to 340,000 tonnes of cane in a good day. So if you divide what we are forecasting by that, you'll see that probably in 150 days you'll be done with your crop. So in a year like that, you want to start late and finish early.

In a year like 2008, 2007 when we had actually a lot of cane and actually you left cane at the end of the year, then you want to start as early as you can and finish as late as you can, which is a very different scenario from those years. So having said that, we will probably crush on the dates that we were scheduling.

We might have a delay or early start when we make a program in news that's a standard or an average rainfall in a weekly basis. And basically, if you have an early start of rain, you then crush a little slower at the end and you end up crushing for more time and finishing your crop later.

But again, this year is a year where actually the crushing won't be a challenge. The challenge will be the efficiency, and obviously the challenge will be on the agricultural side to be prepared for actually a larger crop, way larger crop next year. So for that purpose, actually the rainfall at the beginning of the year was a positive.

This rainfall will probably produce a little larger crop, but not with more products because there'll be less sugar per tonne and more tonnes. But this, for sure, helps the other years. So the planting period was actually very good weather.

Okay, that's very helpful. Thank you.

Martin Tabia, Raymond James & Associates.

Hi, good morning. Thank you for the call. My first question is regarding the catch-up in sugarcane question and sugar-ethanol production that you are expecting to happen in the following quarters. Should we see it happening in both the second quarter and third quarter, or should we expect a normal second Q, an extraordinary third Q at the end of the year?

My second question has to do with the gross margins for sugar and ethanol. Could you explain the significant reduction in ethanol gross margin this quarter and provide any guidance on your expectation for relative profitability between sugar and ethanol over the next month? That's all. Thank you.

Yes. We will expect actually a catch-up on second and third Q, yes. So in theory, we should be crushing -- we have more capacity this year to crush. So in the peak month, so the second Q will be actually better than last year because of more crushing capacity.

The ethanol thing is a lot explained by actually the delayed part as well, because remember, in the last two years -- and this year is not different. It will be a third year that way ethanol is staying less or having less margin than sugar. So what makes people do here is they actually do the most with a towards sugar mix possible.

Which means that at the beginning of the crop and at the day of the crop this actually gets even more sugar-oriented. Thus at the end, you want to somehow maximize. And where you're not full, the downstream of your mill, which actually where your distillery and your sugar factory is located, they are actually running idle.

So you can actually have even more flexibility to make more towards one product versus the other. This is actually more important at the end because everything is kind of [stabilizer] during the crop, because at the beginning you start to produce sugar and you end up producing ethanol.

At the beginning you have to stabilize the yield. So you have some discount on that. But the rest, big effect is you end up having more idle equipment on the ethanol part. So the allocation of costs actually goes more towards ethanol; you end up having less, even worse margin on the ethanol side.

Christian Audi, Banco Santander SA.

Thanks. Hi Marcos. Just to clarify on the sugar and ethanol, on this point that you just made about catching up, I just want to understand so in your view the catch-up is something that would happen more now in the second quarter than in the third, or is it a catching-up process that will really kind of evenly happen both in the second and in the third?

Sorry -- again, it is tough to say that because we run on statistics here. So it's probability. I would say that in theory, you will have a very strong second quarter. If you have a weather like we are having today, lot of days, we'll be actually doing a good part of the recuperation.

At the end, we are not that far from our plan. We are very close to the plan. And the plan actually is having a strong crushing month during the dry season, which is actually the idea of concentrating the crop.

So if you have, let's say, regular rain or average rain, average of 10 years in a (inaudible) basis, we're talking about having a big chunk of recuperating on this quarter [we're leaving] now, and probably less than half of the total on the last quarter. But if you have some additional rain, you have plenty of room in the last quarter to actually catch up on the difference.

Okay. And then on the distribution side, going back to the topic of mix, it sounds like, from a sustainability point of view that for 2012 it's fair to assume that this quite positive mix that you've experienced should continue. But my question is more looking at 2013.

Do you see anything that could significantly change what has been an attractive product mix for you, whether it's government intervention or anything else? Or no, it's really more a 2014 issue? In other words, for the rest of this year and into 2013, is it fair to assume that the product mix will remain quite positive for you? And it's really a question mark of what happens in 2014. How do you see that?

I think -- if you asked that to me a year ago, I would say that probably we can have [a good] growth. But I don't see that happening very soon. I really believe at this point that if you, again, regain the attractiveness of the ethanol production, you will still need something like five years to catch up what is still not being invested and grown to have mixes that are compared to, let's say, three years ago.

In the end, the internal consumption has been growing. So the fuel side -- the fuel as a whole -- the auto fuel as a whole is growing. So imported gasoline is really more than 100,000 barrels a week. It is getting very, very, let's say, towards gasoline.

And I think the catch-up of this process, you will need probably -- you have first people planting and having, let's say, the full capacity of the installed factories running, which is actually, I will say, a two-year cycle, three-year cycle. And this is so happening now. Probably if we have the conditions that are necessary in two years, you'll be ready for that.

But when you're talking about the other needs, then you're talking about green fuels. And this is kind of a five to six-year project to start to run, and then probably seven to be kind of full capacity. So then we're talking about longer range of years. So again, I think at this point for, let's say, a stock exchange investor, we are talking about something that is quite structural for a while.

Okay. And also on the distribution side, can you provide us with an update on we're halfway through the year as for as the rebranding process. How many of the -- I believe the target was around 1,400 conversions have been made -- where do we stand here mid-year into this process?

We are, at this point, with that number you mentioned in terms of contracts signed. So which is kind of the first, let's say, milestone on the profit. Out of that, I would say 80% is converted physically. The rest is work in progress. And this is -- it is not -- this is really our throughput.

So we can do X conversions per month with the service providers we have contracted for that matter. So that's kind of -- we want to have a pipeline that is full and a process that is efficient and we convert X stations per month. So we have that happening well. But now you have, at the end, the last 200 to 300 stations that are under negotiation.

And this negotiation is -- the way we are doing, we've been doing a scheme that is more long-term oriented. So we want to not only negotiate and say, I'll come here and rebrand your site and tomorrow we'll have another brand. But we are actually really revisiting the contract, doing -- signing a long-term contract, agreeing on economics and having everything set to actually start kind of a new life and a new flag very structured.

And they're in line with all the other contracts. So this is why we have that last, let's say 200 to 300 contracts to be signed. And these will probably be finalized this year, something like that.

I mean, it's a very impressive speed at which you did all this. So given that it's -- quite a bit has been done already in the first half of the year, can we assume that maybe for the rest of the year margins are more stabilized? Because the bulk of this rebranding, like you said, around 80% of the contracts already signed is behind us.

So to think that there is upside to the margin you generated this quarter may be progressive, given that there is only 300 or less, 200 negotiations. So is it fair to think that it's more flattish from here to the end of the -- from now to the end of the year, and maybe upside only comes more in 2013?

Again, I think there is -- obviously, the more physical thing to see on the synergy and in the work of the Company. Obviously at this point, we start shifting from synergies to really doing good work. So at the end, a lot of things that -- (technical difficulty) -- but I think a lot of things are -- and we are learning a lot on the process.

And we have many, many initiatives from convenient stores towards methods of payments, all the way through branding, relationship management, logistics, infrastructure, a lot of stuff that has been done since we started this process. And this has actually been very successful. Some of those initiatives actually started before the JV.

In Cosan fuels and lubricants, still when we started opening mills, we opened like -- we made four investments and new terminals for opening new markets. And obviously when we merged the companies, this new infrastructure was starting and ready to do stuff. So from now on, we'll start to really have trouble interpreting synergies from (inaudible).

Right, right. And then on that front, as you look ahead to 2013, thinking about CapEx, more specifically growth CapEx as opposed to maintenance CapEx for the distribution business. With the rebranding behind you, do you -- are you foreseeing -- and I know you've probably got -- have not got to that point of doing the CapEx for next year. But do you foresee a growth CapEx for the distribution business for 2013 that is maybe as aggressive as it was in 2012, or we should expect kind of a more natural, maybe decrease in this growth CapEx into 2013? How are you thinking about that?

I think actually you should expect a slow decrease on that going forward, given that the more you grow in this business, the more marginal growth CapEx becomes. So for instance, when you're growing into a new region and then you have to actually put an infrastructure there, have not only on the OpEx side but also on the CapEx side your operation installed in the region.

And after that, then you have to [tunnel] gas stations and let's say, invest in the market. When you're large enough -- I mean, even your contracts, when you're kind of strong in one certain region, even your contracts are cheaper. So at the end, this gets better and better on the long run.

So there's a combination that you should expect that the CapEx originated on capturing the synergies or putting the companies together and having things organized as one single entity, this should be ending at the end of the year. And then the growth becomes cheaper on the long run as well.

As we mentioned, the focus in growth there is this white flag that we feel that especially with a smaller mix of ethanol, we are really feeling a -- seeing that it's more -- a lot more appealing to carry a brand than to be a white flag. So this is actually where we are really targeting to grow on the commercial side. So -- and this is actually a cheap -- it's an inexpensive growth.

Right. And that white flag expansion, this cheap growth that you're talking about as you're looking to the next year, how much of it would be more in the [Conan] region versus the rest of Brazil more or less?

I do not have that, sorry, we can actually get some numbers on that and you can call Guilherme to tell you. But we're quite balanced. We see opportunities in pretty much everywhere.

[Gustavo Gregory], Deutsche Bank.

Hi, good morning. I wanted to ask if there are any updates on the CZZ collapse?

I think there is no let's say updates on that. Since the last call, I think we are in the same we have -- I know there is conversation happening amongst shareholders. I am not really participating much on those. This is more a shareholder issue than anything. But nothing, let's say, factual or any milestone due to be worth telling or notifying.

All right, thanks.

Felipe Koh, Citigroup.

Thank you. Thank you for taking my questions here also in the conference call in English. I have one question is recently -- hello, can you guys hear me?

Yes, yes.

Hello? Okay, okay. Recently, we heard -- we read actually on the local newspapers about questioning from the Brazilian federal tax entity [DFISCO] about amortizations of goodwill from acquisitions in the past also.

I just wanted to check, do you see any risk of DFISCO trying to (inaudible) year on the goodwill generated on the possible conclusion of the Comgas deal that we should see probably in the coming months, right, as you mentioned in the Portuguese call. And also in the local newspaper, it also mentioned about the Camil deal, right, goodwill on that. Can you give us a little color or elaborate on that? Thanks.

Yes. If you want to get more technical, I have [Suzado] our controller here with us. But what he was saying while we were still in your question is that this is kind of quite old subject that is being re-floated very often. So it's not something that is kind of a new initiative.

It's something that's been talked about for a long time already, probably more than three, four years. Obviously, this can be a risk. If you change the rule before you close the deal, this is a risk. If it's after we close the deal, then I don't see much of a risk. But in your Camil deal question, I didn't quite got the question. If you could you repeat what exactly you want to view?

Just wanted to check if there is any risk on your view that we could not see the NPV generate from the goodwill. I think that you mentioned that in the previous calls that it's about BRL500 million. It's about BRL500 million to BRL600 million. That is a good amount of money. Just to check if you see any probability of not adding --

So another Comgas deal? Yes, I think my last answer helps on that. There is a risk if something changes but we don't believe this is a change that is that imminent and it is a longstanding discussion.

Okay, thank you.

Thank you. This concludes the question-and-answer session for investors and analysts. I will now turn the conference over to Mr. Guilherme Machado for any closing remarks.

So I would like, again, to thank you all for joining us for our conference call for the first quarter earnings release for fiscal year 2013. And thank you all.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.