Cosan SA (CSAN) 2015 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time, I would like to welcome everyone to Cosan's SA third quarter of 2015 results conference call. Today with us we have Mr. Nelson Gomes, CEO and Investor Relations Officer; Mr. Joao Arthur Souza, CFO; and Mr. Phillipe Casale, Investor Relations Manager 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 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. Mr. Nelson, you may begin the presentation.

Good afternoon, everyone. Welcome to the Cosan SA third quarter 2015 earnings conference call. We will start on page number 3. Today as we did in previous quarters, we will discuss each one of the business performance of our Company starting with Raizen Combustiveis, our fuel distribution business; then going to Raizen Energia - the sugar, ethanol, and cogeneration; then natural gas, Comgas; lubricants and the land management company Radar. We also discuss the other business, which basically will reflect our corporate structure. Now turning to page 4, starting with Raizen Combustiveis. And just as a reminder, starting last quarter, the second quarter 2015, we started to report the fuel volumes sold based on the Sindicom methodology, which excludes the volume sold for other associated distributors with Sindicom.

The objective of this change as we mentioned back then is really to make it easier to compare the results that we are reporting with the results that the market is reporting. Now we move to the numbers. The volume on this quarter of our fuel distribution business continued to be impacted by the slowdown in the economic and industrial production. But despite of this macroeconomic scenario, once again Raizen Combustiveis managed to grow above the market. If we compare with the ANP, the National Petroleum Agency, their volume dropped 3% while Raizen's total volume grew 1% mostly due to the 5% growth in the Otto-cycle supported by a strong demand on the ethanol. On the diesel sales, we suffered a 1% drop reflecting the weaker demand as I just mentioned.

As an information, the volume sold on the aviation segment went down slightly 1% impacted basically by the flight activity reduction in [country]. The adjusted EBITDA excluding the asset sales effect was BRL573 million, 7% above same quarter last year. This growth was supported mainly by higher ethanol unit margin and 59% volume growth on the ethanol space. Important to remind once again that our contract model with the retail network is based on the rebate. Instead of anticipating the whole CapEx when signing the contract, this model assumes volume growth to be reached along the way and when the dealer reached this goal, he gets the benefit of a discount, which is accounted internally as a revenue deduction. In this quarter the rebate reached BRL47 million according to the number that you can see in the graphic highlighting in gray.

Just as a reference, the chart on the right hand corner shows the behavior of our unit margin in reals per cubic meter quarter-on-quarter with an improvement when compared to the previous year. Turning to page 5, Raizen Energia. As I mentioned last quarter, we had increased the volume of retail on both sugar and ethanol as well as the offshore trading of ethanol. So we are reporting the breakdown between our own volumes produced and sold and third-party volumes, retail and trading. Those operations, which is basically origination of sugar and ethanol from the market, could generate scale and dilute our fixed cost and of course leveraging our operational and logistics capability. On the other hand when we look specifically at this resale operation trading, the EBITDA related to this is not relevant or marginal.

Now going to the numbers starting with crushing in this quarter, which is the second quarter of the harvest season 2015-2016. We increased crushing volumes despite the unexpected rain in this period. Our 23 mills in activity, remembering that one of the mills Bom Retiro is still temporarily hibernating, crushed 24.3 million tons, 1% less than the same period of last year. Productivity remained at a high level compared to the last crop year with 20% increase from 10.3 tons to 12.3 tons of total recovered per hectare. On average, Raizen has been able to achieve high daily crushing volumes which lead us to believe that by the end of December, the total production volume will be very close to the high end of our guidance. Now talking about volume and prices starting with sugar. The volumes sold in this quarter was 18% higher than the third Q last year and the average price was 15% higher and reached BRL1,065 per ton.

For information, the average price was impacted by the hedge accounting effect on the net revenue of BRL256 million this quarter compared with BRL1.8 million in the same quarter of last year. The ethanol volume sold including trading and resale were 11% higher and the average price increased 7% when compared with the same quarter last year basically supported by higher demand in domestic markets as well as some higher exports volume. On energy cogeneration, the volume increased by 16% but on the other hand the average sales price fell 24% when compared to the third quarter last year specifically due to the sharp drop in the spot price. The adjusted EBITDA, which excludes the biological assets variation and the hedge accounting impact, had an increase of 20% reaching BRL837 million this quarter impacted by the higher own sugar volume sold and better average unit prices on both sugar and ethanol.

The reported EBITDA was BRL606 million, a 4% drop when compared with the same period of last year. CapEx reached BRL230 million in the quarter, a 41% reduction when compared to the same quarter of last year. Part of it is seasonal due to the delay in the crushing volumes, but also is related with an optimization of investment in replanting the sugarcane fields. The last graph in the lower right hand corner shows our hedge position. For this quarter, the third quarter 2015, we have seen an increase on the volume side as well as the price in [reals]. So by the end of September, over 93% of the sugar to be exported in 2015-2016 was hedged with an average price of BRL0.44 per pound. The values in cents per pound reflect the devaluation of the real in this period and also the improvement of the commodity price.

For the next harvest season in 2016-2017 by the end of September, we had approximately 25% of the total export volume hedged at an average price of BRL0.53 per pound. We would like to remind that our hedging policy includes the (inaudible) where the prices are hedged to reals without any exposure to US dollar. Now, turning the page to page 6 on Comgas. Comgas held its earnings conference call last Monday, the reason why I will briefly comment on the numbers. Starting with volume, the positive highlight is on the commercial segment, which increased 5% its volume sold. For the residential segment, we decreased 4% compared with the same quarter last year. We added in the last 12 months 110,000 new customers to the network, but this growth was offset by the reduction of the residential unit consumption which was down 8% due to the water crisis in the State of Sao Paulo.

The industrial segment remains impacted by the economic slowdown and went down 5.7% compared with the same quarter last year. As presented in previous quarters, the chart on the right shows each segment's relevance on total volume sold and their contribution margin. The expansion focus are both on commercial and residential segments, the ones where we have higher unit margins. Now talking about the normalized EBITDA, a combination of facts drove 6% growth. The first one is the better sales mix on this quarter as shown on the previous chart; second, the better expenses control; and finally third, a tariff review granted by the regulator both in May this year and December of last year. On the regulatory current account, this quarter there was basically no recover due to the real depreciation, which also impacted the IFRS EBITDA.

Now turning to page 7. The lubricants business was also impacted by the lower economic activity in Brazil, but the Company managed to show higher EBITDA basically because of one, better results for international operations and two, a better sales mix both on finished lubes versus base oil and synthetic lubricants versus mineral. On Radar we had a higher revenue from our own land sale in the quarter, but the relevant effect on EBITDA was due to the zero effect on the variation on the fair market value of our own portfolio in this quarter as you can see in the green area on the graph. Now talking about the other business, there was no significant variation on the total expenses. Just a reminder that the main components of these costs are consulting services and fees as well payroll expenses of the quarter.

Now turning to page 8. We will now pass over to the pro forma Cosan SA consolidated results, which includes 50% of Raizen and 100% of the controlled business. Net revenue on the quarter increased 14% reaching BRL11.4 billion. On a year-to-date basis in 2015 the net revenue was up 9% reaching BRL31.5 billion. The pro forma adjusted EBITDA was BRL1.1 billion including all the adjustments we've seen on the previous slides and it is 11% higher than the same quarter last year. The reported EBITDA was BRL992 million, 2% higher than last year and if you look at the year-to-date adjusted EBITDA in 2015, there is a 6% increase versus the flat reported EBITDA year-on-year. The CapEx on the quarter was nearly BRL380 million, a reduction of 25% compared with the same quarter last year. If you look at the year-to-date, there is a 21% drop mostly due to the lower CapEx in Raizen Energia as I mentioned before and also at Comgas.

Now talking to the free cash flow to the equity. On this quarter, we started to show the cash flow reconciliation on a performance basis, which also includes 50% of Raizen. So despite of the CapEx reduction this quarter, we incurred some higher financial activities resulting in a cash flow of BRL136 million. This reflects basically a higher working capital in Raizen Energia. But it's also worth to mention that the consolidated figure also is impacted by the seasonality of the sugar and ethanol business that is facing a delay this harvest. Looking at the year-to-date in 2015, the cash generation was BRL1.2 billion, 76% higher than the same period of last year and the main reason is the strong cash generation of Raizen Energia in the first quarter of 2015.

Turning the page to page 9, debt and leverage. Cosan's gross debt ended the quarter 3% higher than the previous quarter, the second quarter 2015, mainly because of Raizen's temporary working capital increase as I just mentioned. The consolidated debt profile was mostly concentrated in the mid and long-term and the cost equivalent remains at 94% of the CDI. The debt that are in dollars and are hedged, the cost of those debts are already included in this 94% of the CDI. The pro forma cash and cash equivalents was BRL3.9 billion by the end of the quarter and the pro-forma net debt was BRL11.5 billion so the leverage on the quarter reached 3 times EBITDA. Even with that number, we maintain our goal by the end of the year 2015 to reach roughly 2.5 times or 2.6 times net debt-to-EBITDA basically as a result of better operational results from each one of the business.

Now turning page to page 10. There is no change in the guidance this quarter. As I mentioned before, the only thing that we included is the normalized EBITDA on the Comgas section. Now once we are nine months through 2015, I wanted to share with you how we are seeing the performance of each one of our business towards the year-end. So, first starting with Raizen Combustiveis. Of course the economic slowdown that we faced since the beginning of the year reflected in our volume, but was partially compensated by better unit margin. So, we expect that behavior to remain in the last quarter so we are expecting an EBITDA close to the midpoint of the guidance. So, volume partially compensated by better unit margins. On Comgas, even with the lower volumes in most of the segments also impacted by worse macroeconomic scenario, we will manage to deliver somewhere in the center of the guidance.

The IFRS EBITDA is pointing towards the low end of the guidance due to the real depreciation. Lubricants and Radar are both pointing to the center of the guidance. And finally on Raizen Energia, basically all the metrics here; crushing volumes, ethanol and sugar production, energy cogeneration sales, and EBITDA; they are all pointing from the mid to the high end of the guidance given the higher productivity we are having on this crop season, higher sales volumes, and better price. So overall even in a much worse than expected environment, the results of Cosan SA consolidated for this year remains pointing to the center of the guidance at BRL4.1 billion to BRL4.2 billion EBITDA or 10% up when compared with the previous year.

So with that, I conclude the presentation and we are all here available to start the Q&A session. Thank you.

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

Just wanted to follow up on two topics. First one is just wanted an update on the spinoff of the gas distribution company, I know you guys are in a quiet period because of the debenture. So I wanted to know this idea is not going to go on right now or is this something that eventually when we have the right conditions this is going to go through, there's still an idea within the Company? And the other question is regarding Raizen Energia, specifically on the impact for better rain for next year and then probably better productivity going forward. So do you plan to change the mix towards sugar at this point or more into ethanol because we're probably going to have more sugarcane to crush? And the second one is can we expect kind of this result for next year? Thank you.

Falcao, let's start with the last one. I think it's too early to say how the next crop season will look like. We are in the middle of the crop season now so depending on the rain that we're going to have this quarter, we will know if we're going to have the kind of result for the next year or not. If it does not rain, potentially the volume that we will leave on the fields for next year will be very small, but again it depends on the climate for this quarter. So, at this point it's hard to predict what's going to be the volume or the crushing volume for the next crop season. The other point that you asked is about the mix. As I said on the Portuguese conference call, we should not expect any changes on the mix. By definition, we have a higher mix of sugar and we should remain that way for the next crop season. On your first questions on the spinoff of Comgas, it's still on the radar. We don't want to do at any cost, but for now as you well mentioned, we are on the quiet period so we cannot comment on any future changes on Comgas business.

Okay, perfect. Thank you.

(Operator Instructions) Rodrigo Mugaburo, Morgan Stanley.

I had a question on Raizen Energia. As of the end of the quarter you have roughly BRL2 billion in inventory, BRL1 billion in sugar and BRL1 billion in ethanol. I wanted to know if we should expect those inventory to basically be sold doing this fiscal year fourth quarter or especially in the case of ethanol you will carry a little bit more into the inter-harvest?

It's a little bit of both. We will have some of the volume being sold this quarter, but some will be sold in the following quarter, which is the first quarter 2016, the last quarter for the crop season in the inter-crop season. So, that's the plan. So I would assume that we're going to have a little bit of both.

Okay. Thank you.

(Operator Instructions) This concludes the Q&A session. I'd like to invite Mr. Nelson to proceed with his closing statements. Please go ahead, sir.

Thank you very much for attending the call and we'll talk again on the next one. Thank you.

That does concludes Cosan's conference call for today. Thank you very much for your participation.