Cosan SA (CSAN) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Cosan's first quarter of 2014 results conference call.

Today with us, we have Mr. Marcos Lutz, CEO; Mr. Marcelo Martins, CFO and Investor Relations Officer; and Mr. Guilherme Machado, Investor Relations Manager.

We would like to inform you that this is event is being 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 this call, please press star zero to reach the operator.

The audio and slideshow of this presentation are available through the live webcast at www.cosan.com.br/ir. The slides can also be downloaded from the webcast platform.

Before proceeding, allow me to 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 belief 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 all [primary factors] could also affect the future results of Cosan's and could cause results to differ materially from those expressed in such forward-looking statements.

Now, I'll turn the conference over to Mr. Martins. You may begin your conference.

Thanks. Good morning everyone.

I would like to start our presentation with the consolidated pro forma figures for Cosan SA. Just wanted to remind you that we [were having] our first quarter; I mean, we're basically [releasing] the earnings for the first quarter of Cosan SA. But this is also the last quarter of the fiscal year for Raizen. So, as we haven't changed the fiscal year for Raizen, we'll compare the first quarter of all businesses except for Raizen Energia; then we're going to talk about the end-year results.

In terms of the net revenues, [the focus on SA], we have seen an improvement of 13% -- a growth of 13% in the first quarter, reaching BRL9.6 billion with an EBITDA of BRL1.02 billion, representing a growth of 13% compared to the first quarter of last year.

EBITDA margins remain stable at 10.7%. And the net income jumped from BRL27 million to BRL256 million in this quarter, presenting growth of over 850%.

Just wanted to call your attention to the fact that there was an improvement of over BRL70 million in the financial income, basically as a result of the exchange rate variation between the first quarter of last year and this quarter, as we had a [net] appreciation of the US dollar [or] an appreciation of the real at the end of month of March of at the end of 2014.

[Can start with the different business lines], starting with Raizen Combustiveis, which is the [distribution] business for Raizen. We had a growth of 10% in the volume sold, which basically surpassed the growth presented by the industry overall, as measured by ANP. We had an increase in our market share and growth of 13% in the sales of the products in the Otto Cycle and 9% in the sale of Diesel.

We had also a growth in our net worth that reached almost 5,000 stations at the end of the first quarter. That does not include the 215 new stations we acquired in the south of Brazil with the acquisition of Latina.

[We had also] included the number of C-stores that reached 900 stores at the end of this quarter. [Ready] growth in the volume sold of 10% and a growth of 8% in the average price; therefore, net revenues -- we presented net revenues of BRL13 billion for [BRL 13 billion] in the first quarter of last year.

In terms of the EBITDA and the EBITDA margin, we had an EBITDA of BRL521 million at the end of this first quarter compared to BRL423 million in the first quarter of 2013, showing growth of 23% with an EBITDA margin of 4%.

Now, moving to Raizen Energia, we have for the crop year of 2013, 2014 a growth of 9% in the volume crushed, reaching 51.4 million tons. In terms of the share production, we reached 4.5 million tons of sugar produced for the year of 2013, 2014, representing an 8% growth compared to last year. Ethanol production grew 7%, reaching 2.03 billion liters in the crop year of 2013, 2014.

Energy sold volume went down by 28%, impacted mainly by a reduction in the volume traded in the stock market. That basically means that we had a growth in production of [and consideration] of power as part of the agreements [we have signed] in the past, but we had a reduction in the volume traded in the stock market in the year of 2013 and 2014. We also saw a reduction in the TSR of a reduction of 2%. When we ended the year at 131 kilos per ton of TSR compared to 133.5 in the [quarter] of last year.

Net revenues improved 12%, reaching almost BRL9.5 billion with an EBITDA of 2.436, representing a growth of 1% compared to last year, and EBITDA margin of 25.8% compared to 28.4% in the crop year of 2012 and 2013.

We had at the end of this first quarter, or the last quarter of the crop year, we had a volume of sugar hedged for the 2014 [and soon we're presenting] 58% of the overall exports at an average price of 18.6 cents per pound with an average exchange rate of 2.41, representing a total volume in US dollars of $686 million.

Now, [moving to Comgas as we] released our earnings recently. Yesterday, we had a call with the market. We had a volume reduction of 3.8%, mainly as a result of the slowdown in the economic activity and region we operate in Brazil, which is the main industrial region in Brazil. When we basically, in the quarter, sold a volume of 1.3 million cubic meters. The contribution margin improved, which means that the industrial market represented 68% of the contribution margin of the business.

Net revenues reached BRL1.5 billion, represented by a 5% growth. And it basically means that the margin improved mainly as we managed to reduce our regulatory account as we saw an appreciation in the real. That impact and a regulatory accounts was the amount of roughly BRL60 million during this quarter.

And we ended the quarter with a regulatory account balance of BRL283 million, which is 8% above the same period of last year, but it's [luckily] BRL80 million better than we have basically predicted for this quarter in our budget [exit time]. So, the EBITDA of Congas represented BRL342 million with a margin of 22.5%, which basically is a growth of 9% compared to the first quarter of the year of 2013.

And Rumo, we also saw a big jump in the volume loaded at the port, representing 2.7 million tons or a growth of 27%. Net revenues grew 24%, reaching BRL208 million with an EBITDA of BRL93 million with a margin of 44.7%, representing a growth of 35% compared to the first quarter of 2013.

In terms of Cosan Lubricants, this is the business that has the performance [goals] most effected by the economic slowdown in Brazil and also by the exchange rate appreciation -- the appreciation of the [power] increased this month. We saw in the month of April an improvement in the margins as managed to basically pass part of the cost of those products on to the final consumer.

But in the end of the quarter, in the first quarter of the year, we still saw the negative impacts as it was extremely difficult to pass on a hundred percent of the cost increase to the price; and therefore, we had an EBITDA 50% lower than the first quarter of last year, basically, of BRL23 million; [before], BRL48 million in 2013.

For Radar, we saw a big jump in net revenue as a function of the sale of properties in our portfolio. Those sales represented basically over BRL40 million, or around BRL46 million. And we also saw a reduction in EBITDA as a function of a reduction on the fair market value of the portfolio [in the package]. This is the time of year when we basically reassess the portfolio as it's done by Deloitte. And what we saw this year was the reduction in the fair market value of BRL21 million compared to a growth of BRL55 million in the first quarter of 2013.

Now, moving to our net debt position, we also saw a reduction in leverage of the company by 0.3 times. So, at the end of the quarter, we had a net debt EBITDA ratio on a pro forma basis of 2.4 times, [context] 2.7 in the end of the month of December, represented by a net debt of BRL9.6 billion on a pro forma basis compared to BRL10.3 billion in December, which basically means a reduction of BRL700 million.

We saw a reduction in the debt; we saw an increase in the cash position. And therefore, again, also is a function of the impact of the exchange rate variance during this period, which was an [upset to just a little bit depth], but it was not the only factor that played in the reduction of the leverage of the company.

In terms of the guidance we provided to the market, we basically maintained the previous guidance as we mentioned in the last conference call. We will eventually revise the guidance as a result of the [quarter exercise for] Raizen. But after we finish that exercise, basically, the [type of] guidance as we have previously disclosed to the market.

There is a question about what could potentially happen or what factors could eventually impact production of sugar and ethanol at the peak of the crop season. So, there might be a negative impact, [as there is] a chance that we're going to see more rain than we would normally see at this time of the year. But we're going to wait a little longer to see how it will play out before we [make advice] on the production in the sugar and ethanol business.

We have also included a slide with the subsequent events [of sequences through] the earnings in the fiscal year of 2013. We had Raizen Combustiveis announcement of the position of Latina, which is a fuel distribution company in the south of Brazil, which basically reinforces the strategy to strengthen the position of the Shell brand in the [top] of Brazil.

We had also the announcement of the partnership with Sapore, which is a company dedicated to the production of meals and restaurants -- [corporate] restaurants in Brazil. We have announced the formation of the company called Sabor Raiz, which will be dedicated to the convenience store business at the railroad station in the state of Sao Paulo.

We have also on the 24th of February disclosed our proposal for the merger between Rumo and ALL, which was submitted to the Board of Directors of ALL and approved by that board on the 15th of April. [Substantively] on the 8th of May, they submitted the transactions. The approval of the general shareholders in our meeting when it was approved by that shareholders meeting, and we're now awaiting the approval of CADE, which is the Antitrust Commission in Brazil and ANTT, which is the regulator for the railroad transportation company in Brazil, as well.

We have added one final slide, just explaining how the corporate structure of the Company would look like after the spin-off of Cosan SA for resulting information of Cosan Logistica. And we have also mentioned, in the previous calls today, that there is a chance that in the future, once we formally form the new venture as a result of the merger of Rumo and ALL, that will eventually [collapse] the Cosan Logistica to four more single entities, or at least to have one single [logistics] company in the market.

It's a possibility. We're not confirming it's going to happen, but as we don't expect Cosan Logistica to have any assets outside of the joint venture between Rumo and ALL, it would make sense at some point in time to merge the two companies to end up with one single logistics company in the logistics business.

So, with that, I'd like to wrap up my presentation. Marcos, Guilherme and I are here to answer your questions. Thank you.

Thank you. We will now begin the question-and-answer session for investors and analysts. (Operator Instructions).

Our first question comes from Mr. [Anthony Forcum], HSBC.

Good afternoon, everyone. And for the ones in New York, good morning.

My question is regarding CapEx for Energia, specifically. Since we know that some of the smaller players or the more leveraged players are not going to crush or have a lot of difficulties in crushing, do they see more room to get more third party cane other than your own cane? And with that, not to invest as much and renew this crop relative to last crop? I just wanted to know if there could be some upside or further reduction in CapEx because of what's happening in the sector. Thank you.

This is Marcos. At the end, we are completely focused [on the] operation on cost reduction [here]. When you say not renewing a cane [field] because you don't need as much cane, this at the end means that you end up with cane fields that will produce at higher cost because the [increase that way] won't change and your [rapidity] will go down.

And [just for] the operation of cutting the cane, loading the cane and transporting the cane to the mill, this operating is almost two times the total cost of industrial activity. So, actually, having lower performing cane fields is a bad idea.

What we could argue is that will [us] be willing to reduce our acreage, therefore, let's say, give back to the land owners the land or pay when we don't renew contracts or things like that and get a smaller acreage and actually [do this] on a [long one] for suppliers. Again, an observation of one year like that won't change that decision.

Our long-term plan is, in fact, to have suppliers in a larger percentage. This year, we will be able to crush -- we would be able to crush more cane than we are actually planting because of lack of cane. So, even having people not crushing this year and people, let's say, not [extracting] as much, the fact is, the amount of cane available in the [Brazilian south] is actually smaller than people were anticipating because of the dry weather.

So, the answer, in the end, is no, in one side. This is not bringing that opportunity up. And the other part of the answer is yes, we are actually substituting on the long run our own fields to actually supply it. They are, let's say, reliable and loyal to us because of the relationship we create with technology, with supply chain, with programs and things like that that actually bring that loyalty level up.

Thank you. And just one more follow-up on the sugar and ethanol. Do you think, and you commented on the El Nino in the second half of the year -- you know, with more rain, do you think specifically, and I'm talking to your team on the ground, that more rain, at least in June and July, could reduce, and how much, your output for this year, since we know it's probably one of the strongest or the strongest [months] in terms of crushing. So, if we have rain there, how much you can expect and what can be done to mitigate it? Thank you.

This year with El Nino, the probability or likelihood of having some rain in the dry season is higher; you're right. We are actually watching this very closely. If this happens, in one side, you increase your productivity of the cane fields; so, somehow, because it's been dry, if we had, let's say, some rain at this time of the year, you end up having a little more cane. But in the other side, it will be tough crushing.

Again, the [exact] impact of this is impossible to measure at this point because you don't know how much rain this will be if, in fact, there will be some rain, and for how long. Because at the end, if you have a couple of days of rain, strong rain or even a week of strong rain in the middle of the year, impact [is a] positive thing.

So, use this time to do maintenance in the mills and, in fact, the cane fields will like some more water in the middle of the year. So, at the end, this can be positive. What will be negative will be actually a sequence of weeks of rain -- not [as that strong], but someone compromise the field operation and, let's say, cutting and transporting of the cane in the middle of the [day] of the crushing season.

But again, I cannot give you a number. What I can tell you is that cane is a lot more resilient than other crops. So, somehow, those impacts are on the range of 5%, 3%, 7% -- not in the range of 30%, 20%.

So, I -- we gave guidance here. We stick with it. I mean, we believe this is a range that we can [land]. So, even with all those considerations we've been talking.

Thank you so much.

Excuse me. Our next question comes from Mr. Pavel Molchanov, Raymond James.

This is actually Justin Jenkins on for Pavel. And thanks for taking the questions. I suppose I have just a couple more macro-related questions. First, can you give us a status update on potential increases in ethanol blending targets in Brazil? And second, somewhat related, I guess, can you share any thoughts on the outlook for the fuel price hikes? And then I'll leave it there. Thanks.

Hello, Pavel. There is a very long discussion around moving the [planning] target to 27.5% of [the gas one]. I mean, this makes sense, but probably won't happen this year. What has to be done here is they have to change the law that today states that the range is between 20 and 25 today; [restate] that the range will be between 20 and 27.5. This probably is not happening in this election year, but this is an effort of the union that probably will be successful in the [medium term].

Around price changes in the gasoline quality, I mean, [weather's] been discussed. And naturally, published by [central price] and [Raymond]. It is that central price should be adjusting slowly to market price. We believe that it is tough to do in an election year where inflation is somehow an issue.

But we have [in mind] that there's a slightly, fairly large possibility of having one adjustment -- small adjustment still this year. We don't know. I mean, in the end, we'll have to wait and see. This will probably depend a lot on how inflation on the [other groups] behave and [forces] this decision -- will be linked to that in an election year. So, we don't expect any large change this year.

We do expect, though, a larger adjustment for the coming year. We do believe that next year probably, [on the announcement], we'll do some adjustment that is more major than what we can expect now.

Thank you. That does conclude the question-and-answer session for investors and analysts. I would like to turn the floor back to Mr. Marcelo Martins. Sir, please go ahead.

I'd like to thank you for your participation. I didn't catch a comment that I made. [The part about Sapore] where I said that we will be investing in the railroad side -- convenience stores, which is obviously not the case. Sapore is a company that will be dedicated to convenience stores in the highway or the roadside stations, mainly in the state of Sao Paulo.

Thanks again for your participation and we'll talk to you soon. Thank you.

That does conclude the audio conference for today. Thank you very much for your participation. Have a good day and thank you for using [Chorus Call].