Cosan SA (CSAN) 2015 Q1 法說會逐字稿

Good morning ladies and gentlemen. At this time we would like to welcome everyone to Cosan S.A.'s first quarter of 2015 results conference call. Today with us we have Mr. Nelson Gomes, CEO and Investor Relations Officer of Cosan SA; Mr. Phillipe Casale, Investor Relations of Cosan S.A.; and Mr. Marcelo Martins, CFO and Investor Relations Officer of Cosan Limited and Board Member of Cosan SA.

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 the slideshow of this presentation are available through live webcast at ir.cosan.com.br. 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 will turn the conference over to Mr. Nelson. You may begin your conference.

Good morning. Welcome to the Cosan S.A. first quarter results conference call.

Turning to the third page, for the first time we will not discuss the logistics business here on this conference. Logistics business will be discussed on a separate conference call next week. In this call we will discuss Raizen, Comgas, Lubricants and Radar.

Now turning to page 4, Cosan S.A. consolidated pro forma results, it's important to highlight that what we have in the numbers in this presentation is a reflect of 50% of Raizen, 100% of the Company's control by Cosan. And starting this quarter the results of Comgas will be presented adjusted by the regulatory account. Specifically on this quarter we are excluding the final expenses incurred on the closing of the Rumo and ALL deal.

So starting our Cosan S.A. results, net revenue was increased 6%, reaching almost BRL10 billion. Basically all the business increased their net revenue this quarter.

On EBITDA we increased 17%, reaching BRL1 billion, mainly due to a sales strategy in concentrating all the sales of sugar and ethanol in the first quarter of 2015 where we have higher prices. Net income was reduced to BRL43 million impacted by first a reduction of BRL37 million related to the spin-off of Rumo which was included in the first quarter 2014 and it is not on the first quarter 2015 and also a net ForEx losses of BRL156 million.

Now, turning to page 5, our fuels distribution business, the volume sold reached 6 billion liters on this quarter, 3% higher on the first quarter 2014 and higher than 1% market increase. Special increase or stronger increase on the volumes of gasoline and ethanol while diesel and aviation fuels were stable.

Net revenue increased 8% reaching BRL14 billion and it's a result of an increase on volume that I just mentioned, but also an increase of average prices due to one Petrobras price increase end of last year; and a tax increase on gasoline and diesel already this year. On EBITDA was increased 13% reaching BRL590 million driven again by volume and price increases, but also offset by a reduction of asset sales.

Now turning to page 6, our sugar and ethanol business, given the first quarter of 2015 is equivalent of the last quarter of 2014 and 2015 crop season, what we will discuss in here is the entire crop season which ended in March 31st this year. So net revenue increased by 3% despite of 7% decrease in the crop, reaching BRL9.7 billion. EBITDA also increased 4% reaching BRL2.5 billion, again especially driven by the sales strategy at the end of the crop season, focusing on higher prices.

CapEx, we have a decrease by 8% if we consider the BRL130 million on the completion of the second generation ethanol project. If we exclude the project, the decrease on CapEx will be 10%.

Now turning to page 7, on gas distribution business, including thermal generation the volume was decreased by 1%. If we exclude thermal generation, the drop -- the biggest drop is in the industrial volume due to the poor performance of industrial activity in Brazil this quarter. That drop was partially offset by the volume on the residential and commercial segments.

Net revenue was increased by 1% due to a 2% impact on tariff increase in May and December last year. EBITDA was increased by 6% reaching BRL299 million. If we were to include the impact of the regulatory account on the EBITDA, this number would be BRL256 million due to the negative impact of BRL43 million on this quarter.

Now turning to page 8, our lubricants business, the total volumes sold was decreased by 2% reaching 71 million liters basically due to a lower base oil volume sale partially offset by (technical difficulty) a higher volume of finished product sales. Net revenue was increased by 3% mainly due to an increase on the average price in the first quarter, partially offset by the decrease of the volume in 2%. The EBITDA remained stable and reaches BRL23 million.

Now turning to page 9, Radar; Radar had a reduction on net revenue reaching BRL22 million basically due to a lower volume of property sales. EBITDA reaches BRL27 million in this first quarter and the difference is basically the appreciation of our portfolio in 2015 of BRL14 million versus a devaluation of our portfolio in first quarter 2014 of BRL23 million.

Now turning to the next page, talking about our net debt, our net debt was decreased by 11% especially due to an increase of $1 billion in cash mainly due to the reduction of the working capital of Raizen. All debts denominated in foreign currency are hedged. That will reduce our cash flow exposure.

There is no significant change in our maturity, debt maturity. Our leverage was reduced from 2.5 times to 2.2 times EBITDA if we consider only the net banking -- the banking debt. If we consider other financial liabilities, our leverage will be reduced from 3 times EBITDA to 2.8 times EBITDA this quarter.

Now turning to the guidance, what we have in here is the guidance for the business that we (inaudible) from January to December of the calendar year on the first part of the slide. So we are confirming what we have said last quarter, so there's no changes in the guidance for those business.

And on the bottom of the slide we are now confirming the preliminary guidance that we offered last quarter for Raizen Energia on the crop season 2015-2016. We are also including here the actual numbers for the last crop season that ended in March 31st.

As you can see, there is some volume increase of the sugarcane crushed expected for this crop season. Also our -- sugar volume and ethanol volume increased, but a substantial reduction of CapEx in this next crop season from BRL2.3 billion -- or BRL2.2 billion if we exclude the second generation ethanol project to BRL1.7 billion which is the middle of the guidance.

So with that, I would like to turn it back to you for the Q&A. Thank you.

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

Thanks for the conference call. Marcelo, I have two questions. First one is on the fuel distribution side, is there any particular reason because we have a clear benchmark which is Ultrapar, we expected higher margins basically coming from import levels and from the increase on the price of gasoline.

So if you could elaborate a little bit why you guys performed below Ultrapar and what could justify that, was that jet fuel or something sold? That's the first question.

And the second question is regarding cash flow generation. Most of your cash flow generation is basically coming from the reduction on inventories. You've sold all your sugar on this quarter which is seasonally expected. But I just wanted to [get you] on how much you guys expected in terms of consistent and recurring cash flow generation going forward in the next two to three quarters?

Falcao, going to the first one, our EBITDA on the fuels business was BRL590 million, okay? Now, if you add all up all the effects of inventory gains, imports, and asset sale this quarter, we are taking about something around BRL50 million.

So this is in line with our expectation, and as I said on the Portuguese call, we have almost zero effect on the asset sale this quarter, so around BRL50 million on imports and inventory gains. And that's -- that's again, it's in line with our expectation given the very low level of inventory that we run the fuels company. We usually run on a very low level to optimize the capital employed into the business, okay?

BRL50 million is not included in the BRL550 million or it is included? It's outside?

It is included. It is included. BRL50 million, it's included on the BRL500 million.

Okay.

The second one on cash flow, the operational cash flow was about BRL2.2 billion, and if you exclude the CapEx and the interest paid on the quarter, the cash generation is about BRL1.2 billion. If you want to get more details, the guys here, Guilherme and Phillipe, they will have all the details for you if you wish.

That will be amazing. I'll follow up.

Fernando Ferreira, Merrill Lynch.

Thanks for the questions. I have two questions. Can you give, one, us an update on the spin-off of the gas division? That will be the first question.

And then second, just like to have more details on those expenses regarding the deal of Rumo ALL that were booked under Cosan S.A., wanted to understand why they were booked under Cosan S.A. and if there is going to be any sort of a reimbursement or if those expenses are already paid off before the spin-off, I mean just to understand this. Thank you.

Fernando, Marcelo Martins will answer the first one. On the second one, on the Rumo ALL, let's remind that this operation was pretty long operation that started more than three years ago and it's a very high complex operation as well.

It involved determination of a series of contracts and liabilities that we need to make sure was completed before the final incorporation of the company. We also have on this amount of money expenses with finance advisors, tax advisors, legal M&A, and most all of them conditional to the final close of the deal, okay?

Also important to remind that this was expected and we demonstrate that in the guidance on last quarter. We didn't know when this was going to happen because it was related to the final closing of the deal. But at the end it's finished, it's done. So there is no more expenses related to this deal to be booked into the future, okay?

The reason why it was booked in Cosan, since the beginning this -- all this obligations were built when Cosan was the controlling shareholder of Rumo. So that started -- that deal discussion started with Cosan, so it had to be finished by Cosan.

We were expecting costs related to this merger and because of that Rumo paid at the beginning of last year, even before Cosan Logistics Company was formed an exceptional dividend of BRL250 million to face these kind of obligations that we were signing on behalf of Cosan S.A., okay? So that's the reason why we booked that all in Cosan.

Yes, Fernando, it's Marcello. Just to answer your first question, if you recall it, the actual spin-off of the gas distribution business was conditional upon the refinancing of the perp under acceptable market conditions.

So what we know at this point in time is that market conditions are improving, but they are not, in our view, at this point in time good enough for us to go on with the refinancing. So whenever we think that the conditions are acceptable, we'll refinance that perp and then we will be in a position to do the spin-off.

Okay, great. Thank you.

Juan Tavarez, Citibank.

My first question is regarding just the sugarcane crop; you mentioned that you potentially reached the top end of your guidance on the crop on crushing activity. I'm curious if that's because of the conditions that the crop you're seeing are bit better or you would look to buy more third-party canes, kind of fill in the gap there.

And then also just to get some insight, if you were to reach the top of your guidance on sugarcane crushing, would you have to accelerate some of your hedges for sugar or you're comfortable with your current position?

Juan, the answer to the fist question is really for climate conditions, not because of more sugarcane, okay? The second one we are not changing any piece of the strategy of hedging on the sugar business.

So we are maintaining -- we are at this point at the same level that we were in the same time of last year, the last crop season. So there is no changes in our position on the hedging on sugar.

And any thoughts about idling any further capacity or you're going to keep operating at current utilization rates, if you reach the top end of the crop.

Our current capacity now is 67 million tons-68 million tons a year. We are expecting to crush this crop season around --

Up to --

-- as the guidance up to 60 million tons.

But you won't be shutting down any mills.

No. No.

Thank you for taking my questions. All right. Thank you very much.

Rodrigo Mugaburu, Morgan Stanley.

I have two questions, maybe the first one for Marcelo. Just wanted to confirm that from the next quarter onwards when we see the Cosan Limited release we will also see Rumo ALL consolidated numbers in that?

And then the second one, Comgas, when we see the IFRS EBITDA for the quarter was down 25% and then the guidance is that we have it under IFRS also. So I wanted to check that you still confirm the guidance under IFRS after this quarter or if you have a guidance of a normalized EBITDA and what that could be. Thanks.

Rodrigo, In terms of the consolidation of Cosan Logistica, you're right, it's going to happen next quarter because the deal was actually closed on the 1st of April of 2015.

Your second question was about Comgas, right? So Marcelo is going to answer that?

So as you mentioned, starting this quarter we will start to report our results of Comgas including all the effects of the, how do you say, the regulatory account. With that, the guidance, we can provide both guidance. We can provide the guidance with the impact of the regulatory account and without the impact of the regulatory account.

So do you have a normalized guidance because the ones that we have right now, it was under IFRS, right? So I wanted to review (inaudible) a normalized EBITDA guidance.

I don't have here in front of me the exact numbers, but the guys here will give that information to you after the call.

Alexandre Falcao, HSBC.

Again, other two questions. First one is, can you comment on the recent change in Comgas, the regulatory discussion with the Sao Paulo state government? Just wanted to know what it means, that the (inaudible) the Cosan capital is going to be redefined? Is this a positive sign, is this a negative sign, and what are the timeline for that and how are the discussions on the [lien] and the minimum value of the concession. That's the first question.

The second question, just want to have a quick follow-up on the margins, just looking at in a recurring basis, your competitor posted something around a BRL100 per cubic meter; you posted recurring BRL90 per cubic meter. Just wanted to know where this difference comes from? Is this ethanol is this in our jet fuel just [pay for that]?

On the first one on Comgas, of course we hope that the [work] will be better than the one that we discussed before. But we cannot guarantee that what kind of results will come out of the discussion.

Margins.

On the margins, if you look at -- again, if you look at our EBITDA, the impact of the inventory and the imports was in line of the expectations. If you look at the, what you call recurring margin, the big chunk of it, it's the rebates that we had in this quarter on the amount of BRL40 million, okay? So you should add those BRL40 million up to make sure that your recurring calculation is correct.

Okay. That's very, very helpful. And just a quick follow-up on your first answer. Any news regarding the discussion on the [VAN]? Is this something that's on the hands of the governor or at least cabinet should decide if this was something that was going to be changed or not?

Do we have any clarity on that? And when can we -- when are we going to have this? Do we have any sort of a hard deadline for them to decide?

Of course there is no deadline and it's really hard to predict any outcome of the discussion while the discussion is still going on, is still taking place. But of course we -- our angle of the discussion is positive. So we expect that the work will be calculated in a more recent conditions, so we are expecting a positive outcome. But again, it's hard to predict while the discussion is in course.

(Operator Instructions) [Soledad Kuroni, Laryangsville]

I would like to ask you some questions on Raizen Energia. Could you give us some guidance on the agricultural yield and on the ATRs that you expect for this crop year?

Soledad, looking at the numbers here, the ATR for this crop is expected between a 130, 135. And the [TCH], it's between 75 and 80.

Between 75 and 78. Okay.

75 and 80, eight-zero.

75 and 80. Okay. And as regards the hedge of the sugar price, I would like to know what is the volume that you have a hedge and at what price have you hedged it?

The position of our hedge today or this crop is equivalent of the position that we had in the last crop, so there is no changes in terms of strategy of the hedging for this crop season. The price for the hedge this year is $0.165 per pound in US dollars and a dollar rate of BRL2.80.

Okay. And as regards the CapEx of Raizen Energia, could you tell me what percentage of that CapEx is denominated in US dollars and what percentage in reais?

The CapEx denominated in dollar, it's almost insignificant. It's really everything in reais and local currency.

Okay. Thank you. Thank you very much.

Thank you. That concludes the question-and-answer session for investors and analysts. I would like to invite Mr. Nelson Gomes to proceed with his closing statement. Please go ahead, sir.

Once again, thank you for your participation in the call, and we will talk again on the next quarter. Thank you.

That does conclude the Cosan S.A. audio conference for today. Thank you very much for your participation and have a good day.