Cosan SA (CSAN) 2014 Q4 法說會逐字稿

Good morning, ladies and gentlemen. At this time we would like to welcome everyone to Cosan's 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 a live webcast at ir.cosan.com.br. These 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 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 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 now begin your conference.

Good morning. I'd like to start the call today just explaining how we're going to structure the presentation. As a function of the spin-off of the logistics business that took place in October of 2014, we will now, from now on, present the results of Cosan S.A. and Cosan Logistica separately.

For future calls, we're going to keep doing that and we should also add a short presentation for Cosan Limited as well. Comgas will continue to have its conference call done separately which was the case this time again as we had it yesterday.

I'd like to start the presentation with a comparison between the guidance and the actual 2014 numbers for the different business lines. We were very much in line with the guidance we provided to the market with only one exception, which was the EBITDA for Cosan Lubrificantes which was BRL103 million in comparison with a range of BRL110 million and BRL140 million presented in the guidance.

We have also decided not to present at this point in time the results for Raizen Energia sugar and ethanol business for one simple reason. We have here the guidance for the crop year which will end in this month of March. So as soon as we have the results for the crop year for Raizen, we will present the performance of the business and compare it with the guidance provided to the market previously.

Other than that, I think it's -- I would highlight the EBITDA for Cosan consolidated, which was BRL4.47 billion, the EBITDA for Rumo, despite the challenges we had this year in connection with the lack of transportation provided by ALL, ended up having an EBITDA of BRL304 million and Raizen Combustiveis BRL2.1 billion of EBITDA and Comgas BRL1.435 billion of EBITDA.

Now moving to the presentation of the different businesses starting with Cosan Logistica. We had a 21% increase in the elevation volume in comparison with 2013. We have made substantial investments in Santos and that volume increase was expected as part of the growth plan or the ramp-up of the business. And we had also new contracts signed in 2014 as we had also projected.

The net revenues were very much in line with last year as a function mainly of the decrease in the transportation and the revenues coming from the transportation business as I just explained which also had a negative impact on EBITDA which ended the year at BRL322 million in comparison with BRL358 million in 2013.

In terms of the net debt of the Company, we closed 2014 with a net debt position of roughly BRL700 million. We raised BRL110.3 million of new debt from BNDES financing expansion of the business. And we had at the end of the fiscal year a cash position of BRL86.5 million. That resulted in a leverage of 2.2 times net debt to EBITDA of Cosan Logistica.

We announced the approval of the transaction of the merger between Rumo and ALL by the Brazilian antitrust authority, CADE, on the 11 of February. Since then, we have been working with the last agency that would have to approve the transaction which is ANTAQ and we're expecting that approval to take place in the next couple of weeks.

We have also announced the appointment of the new management of the Company once it's approved by the Board of Directors of ALL which should happen soon, I would say probably in the next couple of weeks. This is the time frame for the merger to be implemented as well.

Just to highlight, Julio Fontana was appointed as the CEO, Jose Cezario as the CFO, Jose Alberto as the Chief Legal Officer, Daniel Rockenbach as VP Operations for the Northern Network and the Sao Paulo Network and Darlan de David as the VP Operations for other network which is the Southern and Western Network.

Now moving to Cosan S.A, Cosan S.A. encompasses Raizen Combustiveis, Energia, Comgas, Lubricants and Radar and other businesses which is basically the corporate structure within Cosan.

This business on proforma consolidated basis had an 11% increase in the net revenue and a 4% increase in EBITDA. The EBITDA resulted in BRL3.763 billion and the net income 16% higher than that of 2013. We are basically adjusting the net income in 2014 to reflect the last quarter of Rumo which was not included in the Cosan S.A. number because it had already been spun off, but it is included in the net income for the year 2013. So when we make that adjustment, we get to BRL304 million of net income which represents the 16% increase compared to 2013.

When we take into consideration the additional devaluation impact or the currency devaluation impact we had during the year of 2014 which was roughly BRL64 million, BRL65 million, we are going to get to a proforma net income, if you will, of BRL370 million which would represent a 41% increase in comparison with 2013.

Now moving to the different businesses under Cosan S.A. starting with Raizen Combustiveis, it was another great year for Raizen Combustiveis. We had an 8% increase in the volumes sold reaching 25.028 billion liters for the year 2014, a net revenue increase of 15% reaching almost BRL56 billion and an EBITDA increase of 12%, getting to BRL2.15 billion for the year 2014. That improvement in the performance of the Company was a result of not only a better mix of products sold, which includes the V-Power reaching 27% of the total volumes sold in the station but also the higher volume and a better average price in comparison with the year of 2013 which had a positive impact from the margins in comparison with last year.

For Raizen Energy, we had a reduction in the sugarcane crushed for climate reasons as we explained before, finishing the year at 57 million tons, a reduction in the sugar production, a slight increase in the ethanol production and a 4% increase in the volume of energy or power sold through the cogeneration of the mills. But the biggest impact on the cogen business was the much better price we attained during the year of 2014 in comparison with 2013. The ATR also increased and we ended the year at 134 [TSR] in comparison with 131 for 2013.

In terms of the performance of the business for this last quarter, we're not including the year-end results here because we're going to do it at the end of the crop year which is going to be March. We had a 24% increase in net revenues and a 53% increase in EBITDA during this quarter. We had higher sales of sugar and ethanol and a better result in the cogeneration business.

I think it's also important to highlight that at the end of this third quarter for the Energia business or fourth quarter for Cosan, we had unusually higher levels of inventories of both sugar and ethanol. You should expect that level of inventories to go down over the last quarter of the fiscal year which is this quarter now. And that had an impact in the cost of -- I'm sorry, in the leverage of the Company as a result of these very high levels of inventory.

So talking a little bit about the hedge, we were at the end of the year at 2.7 million tons hedged, volume of sugar hedged, and roughly 1 million tons for the next crop year at an average price of $17.83 per pound for this crop season that starts now in April and $17.2 for the -- I am sorry, $17.83 for the last crop season which is the one that ends now and $17.2 for the next one at an exchange rate of 2.4 for last year and 2.71.

When we look at this at the price of sugar in reis, so what we're seeing is an adjustment in the price in relation to what's happening with the exchange rate, but overall we're seeing an increase in the price in reis in comparison with what we had last year and we have advanced our hedge since we disclosed these numbers in December of 2014. So we should expect, at this point in time, a much higher hedge for the sugar export.

And in Comgas we had volume [flat] very much in line with last year, an increase in net revenues of 1% as a function of the adjustment in tariffs provided by the regulator, 7% increase in EBITDA reaching BRL1.435 billion with a margin of 22.5%. In terms of the contribution margin, the most relevant business continues to be the industrial segment with 62%, followed by the residential segment with 25%.

Now moving to lubricants business, even though we had an increase of 1% in the volume sold and a positive growth or a 4% growth in the net revenues reaching BRL1.6 billion, we had a negative impact on EBITDA as function of the increase in the cost of the company and the fact that we were not able to pass that cost increase on to the prices in the market. You should expect a better performance for this business during the year of 2015. But as I explained before [this is not a] business line that missed the guidance for the year of 2014.

For Radar we had a higher number of properties sold in 2014 which caused a positive impact in EBITDA -- and in the net -- I'm sorry in the net revenues of the Company that reached BRL158 million and a negative impact in EBITDA mainly as a function of the increase in the cost and expenses related to the sale of those properties that I just mentioned.

The net debt position of the Cosan S.A. reached BRL11.3 billion. 80% of this debt is long term. We have decided to hedge the [perk]. We've been hedging -- we hedge the perk and we keep removing the hedge on a quarterly or a semi-annual basis as we continue to partially finance that debt but we thought that it would be appropriate to hedge the perk and we did it at the end of last year. Same thing for the debt of Raizen that matures after three years. We believe that that debt matures in the first three years is automatically hedged by the sale of sugar in the export market.

So overall, we had a leverage of 2.5 times EBITDA. This is what we call the financial debt leverage. And we have also roughly BRL2 billion of other financial obligations that are not included in this leverage ratio.

We had for this specific quarter the big impact in terms of the devaluation of the real on the performance of mainly of Raizen, but again as we hedged the debt maturing after three years at a very good level, we should expect that the impact should be reduced from now on.

I'd like to end my presentation just going through the guidance for the 2015 fiscal year. We have for Cosan S.A. a projected net revenue between BRL42 billion and BRL45 billion, a pro forma EBITDA between BRL4 billion and BRL4.3 billion, for Raizen Combustiveis, an EBITDA between BRL2.3 billion and BRL2.5 billion which is substantially higher than this year which was a very good year, was a record year for this business and for Comgas, we have projected the EBITDA between BRL1.5 billion and BRL1.7 billion which is also substantially higher than this year.

When we look at the CapEx line we're projecting for Raizen Combustiveis a CapEx pretty much in line with last year. I just want to explain that.

For 2014 we have not included the acquisition of the network in Brazil which accounted for roughly BRL200 million. So when you take that into consideration, you see that there was an actual projected reduction in the CapEx of roughly BRL200 million.

For Comgas, we're projecting the CapEx to be between BRL500 million BRL560 million for the year 2015, for Lubrificantes business, we're projecting EBITDA recovery and EBITDA should reach BRL120 million to BRL160 million and for Radar an EBITDA between BRL130 million and BRL140 million.

Moving to Raizen Energia, this is the preliminary guidance for the crop year starting in April of 2015. We project the volume of sugarcane crush between 57 million tons and 60 million tons, a volume of sugar produced between 4.2 million tons and 4.4 million tons and ethanol sold between 1.9 billion liters and 2.1 billion liters with a volume of energy sold between 2.1 million and 2.3 million megawatt hours and an EBITDA of between BRL2.6 billion and BRL2.8 billion with a CapEx of between BRL1.6 billion and BRL1.8 billion.

So when you look at the guidance you see that the numbers projected for 2015 are substantially better than 2014 and it's going to be a challenging year for Brazil overall and most companies in this country. We're very confident based on what we're seeing in the market up to now during this first quarter of the year that we are going to reach those numbers and it should be another good year for all the businesses.

We are also expecting a higher cash flow generation, especially in Raizen for the year of 2015 and we also think it's attainable considering the overall market condition and the reduction in the CapEx and the other improvements we're planning for the operations of mainly Raizen Energia but Raizen Combustiveis as well.

With that, I'd like to turn it back to you for your questions and Marcos and I will be here to answer them. Thank you.

We will now begin the question-and-answer session for investors and analysts. (Operator Instructions) Gustavo Allevato, Banco Santander.

I have one question regarding the spin-off of the gas distribution business. If you guys could provide an update of the spin-off I will be very thankful. Thank you.

Gustavo, we will start operating, I mean, in April as we announced to the market as we have said business was already separated. But we're not going to do it up until we are able to refinance the perk because we have already promised to the market that that debt should be contributed to the gas distribution business. So whenever we think that conditions are adequate for us to refinance that debt, we will basically move that part of the debt of the Company to the gas distribution business and implement the spin-off.

I can't tell you when it's going to happen. We believe that if market conditions improve, we should do it in the second half of 2015. But we'll have to see how market conditions will keep evolving over time to see if we're going to get there.

Thank you. Pretty clear.

Josephine Shea, Hartford Investment.

Could you perhaps give a little bit more color around hedging? Do I understand it correctly that on an annual basis you hedge the interest and maybe also principal of whatever debt is maturing?

Right, both principal and interest for the perk and also for the debt in Raizen that matures after three years.

And also, all US dollar coupon payments of the total holdco?

Yes.

Okay. And could you potentially give a little color around what the foreign exchange the reis decline has on your financials, maybe like how much capital expenditure is actually US dollar, maybe cost of goods sold, revenues? There are multiple transmission mechanisms of the reis. Could you give some color where is the upside and where is the potential downside? Thanks.

Josephine, the upside is substantially higher than the downside. On the cost side, fertilizer is the main item for Raizen Energia and honestly -- I mean in the present with the overall cost of the Company, it's fairly small. And let me see what else, I think that's -- yes, base oil which is the raw material for the production of lubricants which should have a negative impact as it had for the business.

What you saw this year in 2014 is a very good reflection of what sort of the impact the FX devaluation could have on the business. I mean, the lubricants business, I think is the business that is most exposed. And overall in terms of cost, we shouldn't be very concerned because there is no relevant impact coming from that devaluation.

And then the last question, potential electricity rationing and/or water rationing, is there an impact, should we be concerned or how will you deal with it going forward?

Water rationing has some impact on Comgas and the revenues of the Company because we use gas in Brazil for water heating mainly and for cooking. So whenever there is a water rationing, people are going to use less water, reduce the usage of water and that should have an impact.

If you look at what happened last year and the peak of the rationing basically took place in the last quarter and some in the beginning of 2015 as well. But you will notice that the impact was not very relevant but this is basically where the bulk of the impact will be. Basically [started in] Comgas and my team is telling me here that it was roughly 6%, the impact, on the residential revenue. So we had a 6% reduction in terms of volume in the residential market segment.

[Hojet Varavulzu, Brazil Fotau]

I have two questions concerning ALL and Rumo merger. First of all, I'd like to know if there is any specific date for the Cosan to report the consolidated balance sheet and if you could anticipate us about an idea what is going to be the recurring maintenance CapEx level, about additional provisions or change that could be relevant for us that will be great. That is the first question.

And the second question concerns to ALL's concession renewals. If they take too long to be approved (inaudible) anticipate some investments of the expansion plan before their renewal is granted? And if this is the case, do you think that these investments could be included in the investment amount that'll be required in exchange for the concession renewals? That's it. Thank you.

On the investments and the concession, let me just give you a flavor on that. We do have a 18-month plan that is actually starting now that is to be done no matter what happens on the regulator side, okay. So this is basically putting together a management system, putting together different approach in terms of procedures in many areas, revising basically all the operating manuals of the various systems on the rail operation. Besides that correcting some maintenance backlog that is critical at this point, things like that will be done on the 18 months that comes no matter what.

This in our view will bring good results anyhow. And they are not -- I mean they've done bulk of the investment for sure. This is a number that fits into current budget and I think that's fine.

We do expect to have in those 18 months the renewal granted somehow. And that discussion will be based on the level of service, size, growth and capacity and things like that. So if I could do this with less money, this will be granted anyway. So the number in terms of reis is not what the regulator wants. The regulator wants to really have the service provided at the right level of, let's say, reliability, with the proper growth of capacity, with the systems in place to avoid a minimum level of accidents and things like that. So are very operational KPIs that will be based in the discussion of renewing the concession.

Remembering that the current concession already provides on the current contract that we do have the right to once renew the contract for another 30 years. We also remembering you that (inaudible) is already a 90-year concession, 90. So we're talking about the rest, okay.

So having said that going to your first question, yes, there is a recurring CapEx on rail operation of the size, in our view, is on the range of BRL1 billion a year, a little less, probably like BRL800 million. And so this is probably what we will see on the long run on this operation, okay.

And I'm sorry, just to answer your first question, you should expect us to start basically releasing earnings for the combined entity in the second quarter of 2015 which basically means next quarter.

(Operator Instructions) This concludes the question-and-answer session for investors and analysts. Sir, you may now proceed.

Okay. Thank you very much and we'll be in touch with you again as soon as we have news from ALL or in the next conference call. Thank you.

This concludes Cosan audio conference for today. Thank you for your participation.