Cosan SA (CSAN) 2014 Q3 法說會逐字稿

Good morning ladies and gentlemen. At this time we would like to welcome everyone to Cosan's third 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 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. (Operator Instructions)

The audio and slideshow 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's management and on information currently available to the Company. They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future.

Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Cosan 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. Sir, you may begin your conference.

Thank you. Good morning everyone. I would like to start the call with the pro forma consolidated highlights for Cosan.

We had in this quarter a net positive increase in net revenues of 8% which jumped from BRL9.5 billion to BRL10.3 billion in this quarter. We have seen some volatility amongst the various businesses that form the portfolio of Cosan. The most relevant and positive impact came from the fuel distribution business at Raizen which was enough to compensate some negative impacts on the net revenues coming from the energy business at Raizen and Comgas as well.

Despite the increase in the net revenues, we saw a reduction in the EBITDA of 12% from BRL1.2 billion to BRL1.06 billion in this quarter mainly as a function of the postponement of shipments of sugar and ethanol in Raizen Energia, a lower transportation revenue in Rumo. We also saw a reduction in EBITDA margin from 12.6% to 10.3% in this quarter.

Net income also went down to BRL15 million from BRL206 million last year and the main reason for that negative impact is basically the impact on the exchange rate variance on the debt of Raizen and also higher financial expenses at Cosan SA. Just wanted to remember that most of our debt ceding at Cosan SA was hedged to reais except for the Perpetual Bond in the outstanding amount of $500 million.

Now moving to the different businesses, I would like to start with Raizen Combustiveis, the fuels business. We saw an increase or a jump in the volumes sold of 6% from 6.1 billion liters to 6.5 billion liters. We also saw a jump in the prices of roughly 6%, which caused an impact or a positive impact of 13% in the net revenues of the Company from BRL12.7 billion to BRL14.3 billion during this quarter.

The EBITDA also increased 13% from BRL483 million to 546 million in this quarter and the EBITDA margin remained stable at 3.8% in comparison with the same quarter in 2013.

As for Raizen Energia, we saw a reduction in the sugarcane crushed -- in the volume of sugarcane crushed of 9% from 26.8 million tons to 24.5 million tons in this quarter as a function mainly of the very dry weather that has been impacted the production of sugarcane and as a consequence of sugar and ethanol in the Southeast region of Brazil. We also had, as I said, a negative impact on the sugar production of 12% from 2.1 million tons to 1.9 million tons of sugar being produced in this quarter.

Ethanol production went slightly up 2% from 884 million liters of 903 million liters in this quarter. We also saw a very positive impact on the price of energy sold mainly in the spot market which jumped from BRL170 million per megawatt hour to BRL258 million per megawatt hour in the third quarter of 2014.

TSR as a function of the drought which ended up concentrating more sugar or sucrose in the sugarcane saw a positive impact of 4% from 135 kilos per ton to 140 kilos per ton. The net revenue went down 28% to BRL2.3 billion in this quarter and the EBITDA also went down 30% reaching BRL630 million with an EBITDA margin of 27%.

What we've been doing is we've been adjusting the EBITDA by the biological assets variance during the quarter and in this quarter we had an impact of BRL64.6 million which would lead the EBITDA to roughly BRL700 million if it was not for the biological asset variation during the quarter.

In terms of the hedging of sugar, we had 20.6 million tons hedged for this crop year and 566,000 tons for next year at an average price of $0.1794 per pound for this year and $0.1744 per pound for next year at an exchange rate of BRL2.38 per dollar for this year and BRL2.66 per dollar for the year of 2015-2016.

Now moving to Comgas, we saw a jump in volume of 5%. Even though it was a positive variance, we have been -- in terms of the volumes sold for both the residential and the industrial segments, we've been under what we had planned for this quarter of the year as a function of a slower economic activity and also the drought in the state of Sao Paulo.

Net revenues went down 2% from BRL1.68 billion to BRL1.64 billion, mainly as a function of the reduction in the construction revenues due to a lower investment in this quarter relative to the same quarter of last year.

EBITDA went up 2% from BRL369 million to BRL377 million at an EBITDA margin of 23% now compared to 22% last year.

Rumo had a big jump in the volume loaded at the port of 10% from 2.8 million tons to 3.1 million tons during this quarter. This was a very, very substantial increase in the volume loaded, but it was not enough to offset a reduction in the volume actually -- volume of sugar effectively transported during this quarter. So as a result, we had a negative impact on the net revenues of 21%, a negative -- a reduction of 21% compared to the same quarter of last year, reaching BRL260 million of revenues in this quarter. As a consequence, the EBITDA also went down by 25%, reaching BRL86 million, with an EBITDA margin of 33.1% during this quarter.

For the lubricants business, we had an increase of 4% in the volumes sold, mainly of base oil which was enough to offset a drop in the sale of finished lubes. We saw a 6% jump in net revenues, that reached BRL430 million during this quarter and a jump of 17% in EBITDA, resulting in BRL31 million compared to BRL26 million in the third quarter of 2013.

For Radar, we saw an increase of 69% in net revenues, reaching BRL27 million, mainly as a function of the sale of properties that took place during this quarter. But we had a negative impact in EBITDA because of the decrease in the land portfolio valuation in comparison with the same quarter of 2013.

Now, moving to the net debt position of the Company, we had an increase in the leverage to 2.9 times which was basically a function of the interest -- of the -- I'm sorry, FX negative variance or negative impact on the real during this quarter. Therefore we ended up increasing our net debt position. But the maturity profile of the debt is still very, very reasonable with 91% of the debt maturing in the long term. And it's also worth mentioning that the cost of debt for Cosan was reduced in comparison with the same quarter of last year mainly as a function of a debt refinancing that took place this year.

We have also adjusted the guidance for this year of 2014 mainly as a result in the case of Cosan consolidated of a reduction in the projection for the sugarcane crushed at Raizen. We're very much at the end of our crop season with fuel mills still crushing. It's fair to assume that the actual volume of sugarcane crushed will stay between 57 million and 58 million tons during this year.

The volume of sugar sold will also come down and we're projecting something in the range of 4.1 million tons to 4.3 million tons. And the volume of ethanol sold should be between 1.9 billion liters to 2.1 billion liters during this quarter.

We are projecting a pro forma EBITDA on a consolidated -- pro forma consolidated basis for Cosan between BRL4 billion and BRL4.3 billion and a pro forma CapEx between BRL2.4 billion and BRL2.7 billion. We have also revised the guidance for Rumo for both the volume of sugar loaded which should be between 10.5 million tons and 11.5 million tons and EBITDA which should be between BRL290 million and BRL310 million. And we're doing that mainly as the impact of the reduction in the sugar transported during this quarter and which will have a broader impact in the year. We'll have a negative impact on the EBITDA of Rumo.

For Radar, we're projecting an EBITDA between BRL140 million and BRL150 million. And Cosan Lubricants an EBITDA of BRL110 million and BRL140 million with a total volume sold between 265 million liters and 285 million liters during this year of 2014.

For Comgas, the only number that we're adjusting is the projected CapEx for this year which should be between BRL600 million and BRL700 million.

I would like to turn it back to you now for our Q&A session. Thank you.

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

Christian Audi, Santander.

I had a few questions. The first one, Marcelo, on your last point about leveraging. I know one of your focus has been on deleveraging so I was wondering if you could comment on what your target for net debt to EBITDA is and how soon you think you can get there.

The second question was related to Comgas and the ongoing tariff discussions. Are you concerned with recent discussions related to a potential change in the methodology used to review the tariff?

And then lastly on the fuel distribution segment, I was wondering if you could talk about your outlook for margins. We've had several changes now with the market, GDP not growing as much among others. So I was wondering should we expect the 2015 of more stable margins relative to what we saw in this quarter or do you still expect upside?

And then lastly, can you just talk about more specifically your targets for opening of new convenient stores? You have 930 now. How many do you expect next year? And the same for gas stations, please. Thanks.

Well, in terms of your first question, we have certainly a lower target for a net debt-to-EBITDA ratio which we have also indicated to market to be for Raizen of roughly two times, which is pretty much where they are today.

In terms of the consolidated EBITDA for Cosan on a pro forma basis, we think that it will end up being higher than two times even because, as you know well, once we start consolidating, if we have a transaction approved by [Caji], that number should be higher.

But in any case I think that the -- what we would probably like to do is first focus on the businesses because they have different profiles and therefore the debt profile of those businesses should be different. But in any case we are certainly aligned with the idea of reducing the leverage of the Company.

As I said before, the debt profile is okay, it's reasonable. It's actually good in the sense that most of the debt is long term. And the cost of debt relative to other companies of our size is very good too in Brazil. I mean, in terms of reference to CDI it's probably somewhere between 100% and 110% of the CDI which is a very reasonable cost for a long-term debt profile like the one we have.

Having said that, the purpose of the management of the Company is to reduce debt over time. It's hard to do it when you see spikes in the exchange rate. But the way we're going to achieve it is probably by selling assets that are considered to be non-core for us. And let me just make it clear before you misunderstand me, I'm not saying that we will sell businesses. But we could eventually dispose assets like land for instance or land that we don't consider to be core and use the proceeds for that sale of land to pay dividend and reduce debt.

It's something that we'll achieve over time. We have a plan already outlined for the reduction of debt. In addition to the sale of assets, we'll also increase dividend payouts from the Company. And the idea is that we're going to use those proceeds or part of those proceeds to deleverage the Company.

As I said, we're not going to get to two times in a short term, but we will certainly reduce this leverage over time. I'd like to turn it back to -- (multiple speakers).

(Multiple speakers) -- very quickly a follow up.

Yes.

Is there any space to sell underperforming mills or are market conditions just too difficult to do that at this point in time?

We're not considering shutting down mills at this point in time. We wouldn't rule out any possibility but it's not basically in the -- in the pipeline considering shutting down mills at this point in time.

Okay.

Christian, what I understood, in terms of selling mills, we don't see also a buyer's market. So again, this is also not part of the pipeline because of that.

Going to your question in Comgas, again we -- we're observing the other process -- the regulatory process, we are still comfortable with it. But I'd like to remind that this, I mean we have always the option to move -- I mean to make more or less investment in the next cycle. We always have the option to adapt the Company to a more cash cow generation of capital company versus a large investment growth company.

And obviously the cycle will be what it is. The framework after we negotiate for the next cycle will be what it is and we will adapt to maximize on it. Our view is at the end that makes sense and is aligned with the -- with the state's policy, the state of Sao Paulo policy cycle with larger investments. So we should -- we should basically have this process going to the beginning of or the first quarter of next year. But I like to remind that the communicated regulatory or the communicated plan for the state of Sao Paulo is to double the participation of the natural gas in the Sao Paolo energy matrix, is to also reduce 25% relative to 2005 the emissions which have a very good play for natural gas substitution or entering natural gas in the matrix and ethanol in the matrix.

And the third, again there is a gas policy which is again goes to say the state of Sao Paolo a strong expansion and also finding other ways of supply natural gas for the networks in the Sao Paolo state. So the three of them are communicated in public and those are 100% aligned with what we believe. And we believe the regulatory plan that will result from this negotiation at this point will be on those lines. So at the end, that's kind of our view. If the question is if we are comfortable with the process or not, we will say we are comfortable with the process.

Yes, it was more, Marcos, I was just a bit surprised on potential discussion about changing, if you will, the rules of the games this late in the process because it is a process that's ongoing, that you've been working hard at, and it was just surprising to me that there are speculation and discussions about potential changes to methodology kind of late in the game if you will, that since -- do you fell that that adds a little bit more of regulatory risk?

Christian, at the end, this process -- this is an open process where anybody -- you can actually go to a public audience like that and make your point and propose a new methodology. I mean this is a open process. So this normally brings speculation. It is natural that actually everybody, all the heavy users on the industry and everybody that has some saying around natural gas do participate on this process, and that's part of the game.

You have to keep in mind though that whatever is there, I mean we have a contract and whatever is there defines to us what should be our conduct in the next five years. This can be, again, two main categories will be more like low growth, higher dividend type of plan for next five years or high growth lower dividend type of policy for the next five year. So whatever results from that, again, will -- for instance if we go for lower revenues, will be also higher dividend and lower investment. So at the end, that framework is set. So I think this as an umbrella should make you comfortable with the process as a whole.

But having said that, I don't see any change versus what we discussed in person when we last met. I mean, we are comfortable with the process, and we believe that in line with our wishes, I think the state will also want the expansion, want the growth on the process because we believe that natural gas will be more abundant at the end of the next cycle. And the state should prepare its infrastructure for that. And we are the main player for that. So at the end, that is the core of the discussion.

Okay.

Okay. And for your last question, again, we keep our process ongoing in terms of convenience stores. Again, we should meet the target of 1,500 on the three-year plan.

And opening of gas stations, you are close to 6,000 now. How do you see that in, for example, in a year like 2015 that from a macro point of view will be a more difficult one?

We have opened very few in the last years. What we have done was conversions from white flag. As we have been saying, despite of stronger or a weaker economy the conversion is a process that happens because we propose more value through the operator of a white flag than what they have today. So at the end, this has a lot to do with a organized market where incentives of tax evasion, et cetera, start disappearing because somehow the government is structured in a way that this is more complicated. And therefore this is the trend.

But I have to say the low hanging fruit is pretty much done. So from now on we'll be talking about smaller sites. We always have large sites that are still on the game and those happens as well, but the bulk of it is pretty much converted. But there is growth on this process, let's put a 1% or 2% growth that will come from this or long term because again we still have 40% of some of the sites white flag.

Great. And then on the margin outlook, Marcos, do you see -- again given that the macro outlook and the resilience of gasoline but no much the resilience of diesel looking to 2015, do you see more of a stable EBITDA per cubic meter environment or there is still upsides for again -- (multiple speakers) stable year next year.

We see real stable on the core, we see a stable environment but we have some drivers to improve that margin that is -- are the non-fuel items. And also the V-Power penetration. We launched the V-Power Nitro and this is going well. So things like that also help us moving up a little bit. The core, so that's the regular gasoline and diesel sales, I think is a more stable environment than any time.

Thanks.

Ravi Jain, HSBC.

I had a quick couple of question on the energy side of the business. Could you just give us -- I mean of course it is little to early, but your first initial expectations for the next harvest, I mean do you see a material growth or even assuming a normalized weather should we just expect flat growth in crushing in the Centre South region?

And the second question was little on the ethanol mix. I mean, given an increase in blending and potential price hike in gasoline or some states like Minas trying to reduce ethanol ICMS tax, et cetera, do you see a better ethanol mix next year for you as well as the industry?

I'm not sure if I understand what you mean with ethanol mix, if it's like ethanol anhydrous versus hydrous ethanol. We see --

Or --

What?

Sorry, more ethanol versus sugar, in that sense would it be a swing towards ethanol next year?

Okay. Definitely if you have larger -- higher price of gasoline it would push up prices of ethanol. That will give more incentive to people to produce ethanol. That will divert sugar, sucrose to ethanol and therefore lower the production of sugar and therefore increase the price of sugar and therefore cancel that system.

So at the end, how I normally see those things are somehow communicating markets that in one end a price increase will have a reaction on the other side with a price increase. And sugar at the end is so less elastic in terms of the band than fuels, that they are kind of the rock on this process where if you have for some reason higher prices in ethanol, sugar will always consume whatever is there in terms of demand. So whatever is needed to pay for that sugar, to supply that demand, this would be the price of sugar.

So answering your question is, I might see -- we might see a spike but this is cancelled very quickly by price of sugar on the other side. So I don't see a big changing mix towards ethanol. We might see beginning of the crop more ethanol-oriented, but then you have a reaction on prices of sugar, and this changes in the second half already. So that's probably the case if we see a price increase of gasoline now, okay.

In terms of production for the next crop, again, we don't see a huge growth even if we have perfect weather. I think normal weather, which means raining from now all the way to March, will increase production in our fuels definitely where we see specially third party suppliers with less productivity not only because of the weather but also because of under-investment on the fuels.

So those guys in many cases at the end of the six or seven cuts, instead of replanting cane straightforward they are actually doing a year of soy beans or something like that to reduce their fertilization costs, to reduce the capital needed to replant for another cycle of sugarcane. So this somehow removes some land from sugarcane for one year. This is also a fact.

So I think we will see some growth for next year. But this won't be a large growth. I think it will be a slight growth for next year in terms of production in the Centre South of Brazil.

Thank you, that's very helpful. One very quick follow-up on the CapEx in this business. I mean, I think the CapEx right now is, your guidance is between BRL2 billion to BRL2.2 billion. In the next couple of years, in the next few years do you see an opportunity to reduce that or is that already at a stable level where this is required in the next couple of years, this level of CapEx?

We see a reduction trend. I think it's important to note that according to the IFRS rules my operational costs throughout the intercrop are capitalized. So once we have a year like that where we have less crop years and lot more intercrop -- sorry, less crop days and more intercrop days, you switch some of your OpEx towards CapEx.

Right.

So in fact we are observing an increase in CapEx because of more days of intercrop that are somehow accounted as CapEx. So in fact what we have done this year is reduction of our CapEx. You will see that at the end of the crop whenever all the number is somehow closed and finalized. After we sell all our inventory and all the crops that are today in inventory flow through the numbers to the balance sheet, you will see that there was a quite important reduction of the sum of CapEx plus OpEx.

So the cast generation of the business actually has improved this year. But the CapEx line in itself somehow got a little distorted for less days of crop, therefore absorbing part of the OpEx that otherwise would be OpEx if the crop was there.

That's very helpful. Thank you so much.

Welcome.

Paulo Valaci, Brazil Plural.

I have two questions if I may. The first one is about fuel demand growth in the third quarter. I was hoping you would outline for us how much of that growth is attributed to the Latina acquisition and how much is actually considered organic growth for the period so we can get a better idea of what would be a sustainable growth rate going forward?

And then the second question is about cogeneration. We heard in some local media that a change in how the free market electricity prices are calculated could lead to a reduction in the actual free market price. I was hoping you guys could speak to how this may impact your cogeneration business? That would also be very helpful. Thank you.

Okay, Paulo, first, the first question is pretty much half and half, okay, 2.5% roughly was organic I think, close to 3%. So out of the 6% is half Latina half organic growth. Organic meaning also some conversions of white flags, okay, because there is a organic that we call internally the same-station sales, that is also something we grow, plus the new sites that we had that somehow is organic but not necessarily organic because we are adding market share of new sites, okay. But half will be Latina basically, half will be those two categories.

The other question was on cogen.

The other question was on cogeneration.

On the cogen, definitely if this passes, the spot price will be kept for -- again for a while. So we have today the -- what we call the reference price for any electricity that you produce without selling or consume without buying, which is called [PLD]. This was with a cap of 800 and something and there is a discussion to reduce that cap.

So basically that cap was defined by the highest generation of cost which was diesel in a faraway place. They have to remove that point of production to reduce that cap to 400 and something. I have to say that almost 90% or 85% of our volume is contracted, so not exposed to that PLD. But we have an impact on our extra 15% on the PLD side.

All right, that's very clear, thank you.

Welcome.

Rodrigo Mugaburu, Morgan Stanley.

I have actually two questions. One a follow-up in the net debt, I want to understand a little bit better on the fourth quarter we should see at least a reduction due to the spinoff, right? The Rumo portion of the debt should be out of season three, is that correct?

And then my second question is related to the hedging on the -- that you are hedging -- the 2.6 million tons hedged, how much of that is represented in relative terms of the total sugar to be sold during the year 2014-2015 crop season? Thank you.

The second one is roughly 86% of the volume sold. But again, have in mind that this is based on what we project to produce and this can have a variation up or down to be the very end of the crop. So we never hedge a 100% because you always can actually run a little short in the production and you will be over-hedged or vice versa. So that's the first one. And the other one, you're right, I think that's the case. I mean, when we spinoff Rumo that's -- that is in Rumo we'll be on the other entity.

Okay. Thank you.

Gustavo Allevato, Santander.

Just a quick follow-up for the lubricant business, is there any room to keep improving this business because we saw some improvement in quarter over quarter? So should we expect some improvement for the next quarters? Thank you.

Yes, I think we had two quarters in the beginning of the year that were perfect storms, a combination of very slow demand and mainly because in the -- mainly because of the World Cup that actually was quite a slower on this segment per se. But also we have the combination of a higher FX and a higher base oil price. So we had our main raw material going up in more loose market, I mean very soft market without the ability to pass those price increases -- those cost increases to the price. So we had kind of a complicated moment. We today see the opposite. We see reduction, sharp reduction in base oil price, and we see a tighter demand.

So we actually are recovering this to the levels that we had before with improvements because I think the operation is more efficient every day and actually with larger volumes and more efficient systems. So, yes, we are to resume the positive trend we had, discounting those two perfect storm quarters as we noted last call as well. And basically we are positive with this business, very sustainable, very steady but that have this impact for once.

Okay. Thank you.

This concludes today's question-and-answer session. I would like to invite Mr. Marcelo Martins to proceed with his closing statements. Please go ahead, sir.

Now thank you very much for participating and I just wanted to remind you that on the 21st of November we're going to have our Investors Day in New York. You should have received and saved the date and you should be getting some additional information very soon. Thank you very much. Have a good day.

This concludes Cosan's audio conference for today. Thank you very much for your participation and have a good day.