Cosan SA (CSAN) 2015 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time, I would like to welcome everyone to Cosan's SA 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. (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'll turn the conference over to Mr. Nelson. Mr. Nelson, you may begin the call.

Good afternoon, everyone. Thanks for attending the fourth quarter conference call of Cosan SA.

We'll discuss today all the business we have under the Cosan SA company, which are Raizen fuels, energy business, gas distribution, lubricants, and Radar. We'll go through each one of the business, talking about the fourth quarter results, also year-to-date results. And now, at the end of the presentation we will provide the guidance for 2016 and for the next crop season.

Now, turning the page to page 4, starting with Raizen fuels business, now talking about volume, Raizen volume on this quarter was more resilient than the market, dropping only 1% even with the economy slowdown we faced in Brazil.

In the Otto cycle, Raizen volume in the quarter remained stable when compared with the previous quarter, also better than the market.

Diesel volumes were also stable in the quarter, even though we faced lower economic activity in the period, partially offset by new B2B customers and higher demand for agricultural segment.

On the aviation, the volumes sold were down 8% on the quarter when compared with the last one, impacted mainly by the flight activity reduction in Brazil.

Now, talking about the year of 2015, Raizen presented a growth of 1%, helped from the network expansion and also some volume maturation, outperforming the market.

On the Otto cycle, Raizen volumes in the year were up 4%, also supported by higher ethanol volumes that went up 41%.

Diesel volumes went down only 1% in 2015, while the market went down 5%.

Volumes sold on the aviation segment in 2015 went down 3%, impacted by the main reasons that I mentioned before: the flight activity reduction in country.

The service station network ended 2015 with a little under 5,700 units, a net 326 stations added in the year.

The adjusted EBITDA on the quarter, excluding effects from asset divestments and inventory gains, was BRL771 million, up 23% versus last year, which is mainly due to an efficiency -- reflecting the efficiency on the fuel supply and commercialization strategy.

It is important to remind once again that part of our contract model with the retail network is based on a rebate. So, in this period, this quarter, the rebate reached BRL39 million according to the number on the graphic highlighted in gray.

The adjusted EBITDA for the year reached BRL2.4 billion, 15% higher than the last year. The rebate represented BRL161 million for the year 2015.

Now, turning the page to page 5 and talking about the sugar and ethanol business. And again, as a reminder, we are talking about the third quarter of the crop season here, which is the fourth quarter of the calendar year last year.

Starting with the crushing, since we expanded the production until mid-December the year-to-date crushing volume reached [60 million] tons of sugar cane, at a higher end of our guidance. The agricultural productivity remained at a higher level compared with the last crop year and posted an increase of 15%, from 9.3 to 10.7 tons of total recoverable sugar per hectare.

Now, talking about volume and prices, sugar volumes sold in the fourth quarter 2015 were 3% lower when compared to the same quarter last year, and the average price reached 30% increase. It's worth to mention that the average price is impacted by the hedge accounting effect on the net revenue in the fourth quarter 2014; there was no effect on the fourth quarter 2015.

On the ethanol, the volumes sold including trade and resale were 25% higher, and the average price increased 21% when compared to the fourth quarter 2014, supported mainly by a higher demand on the ethanol and domestic market as well as higher exports volume.

On energy cogeneration, the volumes increased by 42%, due to a higher crushing. But on the other hand, average sales price fell 37% when compared to the same quarter of last year, due to the sharp drop in the spot energy prices.

The adjusted EBITDA which excludes the biological assets variation and hedge accounting impact had an increase of 51%, reaching BRL1.1 billion this quarter, impacted by the higher ethanol volumes sold and better unit prices of both sugar and ethanol.

The CapEx in this quarter reached almost BRL350 million, a 34% reduction compared to the fourth quarter 2014. The reduction was mainly due to, one, the optimization of investments in replanting sugar cane fields; two, the smaller treating area due to the higher agricultural productivity, as we mentioned before; and finally, the conclusion of some of the expansion projects we had in place.

Talking about now our hedge position, at the end of the quarter we had for this crop season, 2015/16, fixed 100% of the export volume with an average price of BRL0.442 per pound. And for the next crop season, the 2016/17, at the end of the year we had approximately 50% of the total volume to be exported fixed at an average price of BRL0.554 per pound.

Now, turning the page to page 6 and talking about Comgas, starting with the volumes, the positive highlight of the quarter was once again the commercial segment, which increased 3% the volumes sold. The volumes sold on the residential segment also increased, 2%, while the industrial segment remains impacted by the economic slowdown and went down 10% when compared to the same quarter last year.

In the year 2015, the volumes of the commercial segment grew 5%, mainly due to the new connections during the year. That's over 1,100 new customers connected.

The volumes of residential segment ended the year stable when compared to the previous year, reflecting from one side the water crisis that Sao Paulo state is going through, offsetted by over 110,000 new customers connected.

The industrial segment was directly impacted by the economic scenario, and the year ended with volumes sold 6% lower than 2014.

Now, as presented in the previous quarter, the chart on the right shows each segment's relevance on total volumes sold and their contribution margin. The expansion focus are obviously on both commercial and residential segments, the ones as you can see with higher unit margins.

Now, talking about the normalized EBITDA, normalized by the current account, on the quarter was 3% lower than the same quarter last year, impacted mainly by the drop on the industrial volume as I mentioned before.

Now, talking about the year of 2015, EBITDA was up 7% versus previous year, due to mainly, one, a better sales mix combined with [a period of] adjustment; and, two, better expense control.

On the regulatory account, this quarter Comgas recovered BRL94 million, ending the period of 2015 with a balance of BRL117 million in our favor.

Now, turning the page to page 7, talking about the other businesses. We're starting with lubricants. Lubricants business was also impacted by the lower economic activity. The market went down 9% year on year, while our volume in Brazil went down 6%. So, we gained market share again the last year.

Even with the lower economic activity, the company managed to show higher EBITDA. It went up 22% versus last year, due to better results from the international operations and better sales mix.

Radar presented an EBITDA of BRL106 million in 2015, lower than last year due to a lower appreciation of our owned land portfolio.

Now, talking about other business, the main components of G&A costs are consulting services and fees, as well as payroll expenses.

There were some extraordinary effects in 2015. On the first Q, as you well remember, we had BRL100 million as an extraordinary expenses related to the deal of Rumo-ALL. And in this quarter, the fourth quarter 2015, we had a positive impact of roughly BRL300 million related to a credit on a severance action.

Now, turning the page to page 8, we will go over the pro forma Cosan SA consolidated results, which includes 50% of both Raizen fuels and sugar and ethanol and 100% of our controlled businesses.

Starting on EBITDA, the pro forma reported EBITDA was BRL1.8 billion in this quarter, 80% higher than the fourth quarter of 2014. When including all the adjustments that I mentioned before in each one of the businesses, the pro forma adjusted EBITDA went up 19% and reached BRL1.3 billion.

In the year, the pro forma reported EBITDA was 22% higher than last year, reaching BRL4.6 billion, which is above the guidance we provided the market. But if we adjust EBITDA with all the effects that we mentioned before, the number is BRL4.2 billion, up 12% versus last year.

On the CapEx, the quarter was BRL450 million, which represents a reduction of 22% when compared to the same quarter in 2014. The reason for the decrease is mainly due to the lower CapEx in both Raizen Energia and Comgas.

Looking at the year, the CapEx was BRL1.9 billion, a 21% drop when compared to the previous year.

The free cash flow to the equity on the quarter reached BRL1.6 billion, reflecting mainly the better operational performance on Raizen.

Now, turning the page to page 9, talking about debt and leverage, Cosan's gross debt finished the fourth quarter 10% higher, mainly due to new debt raised mostly in both Raizen and Comgas. The consolidated debt profile is mostly concentrated in mid and long terms, as you can see in the graph in the middle of the slide. And the cost equivalent remains at a 93% of CDI, which includes all the hedge costs for the dollar-denominated debt.

The pro forma cash and cash equivalents was BRL5.3 billion by the end of the quarter, and the pro forma debt was BRL11.5 billion. So, the leverage on the quarter reached 2.5 times EBITDA, as we expected and as we mentioned in the previous calls with the market.

Now, turning the page to page 10, on the business -- now, we're going to go through the guidance for 2015. On the business managed on the calendar year, for the sixth consecutive year we delivered the consolidated guidance, even in a very challenging year.

Now, talking about Raizen, let's now turn the page to page 11. Raizen Energia, in addition to disclosing the preliminary guidance for the 2016/2017 crop year, we are updating the guidance for 2015/16. Once we went through already nine months of the crop year, then we have now much more visibility on the results that we will deliver.

This review is mainly due to, one, better sugar and ethanol prices; two, a higher ForEx variation; and three, unstable [inter-crop] prices on ethanol.

Now, before presenting the guidance for 2016, please note that the guidance for Raizen is still preliminary, both on the energia -- the sugar and ethanol -- and the fuels distribution business, because the company follows the crop year, as you know, and its budget process is still ongoing. So, we will confirm these numbers on the next Q.

Now, going through an overall comment on 2016 guidance, this guidance for this year points to an improvement in results when compared to the previous year, compared to 2016. So, the year 2016 we still face a very challenging macroeconomic scenario, as you know. However, all the companies are remained focused on capturing all the operational efficiencies that certainly will contribute to better results.

Now, with that, I finish the presentation, and we are here -- myself, Joao Arthur and Phillipe -- to the Q&A session. Thank you.

(Operator Instructions) Alexandre Falcao, HSBC.

Just wanted to go a little bit further on the fuel distribution margin and the guidance for next year. It's clear that we're going to see a challenging environment in terms of volumes. So, I just wanted to know, given your midpoint in the range flat EBITDA for this year, is this -- are you counting in any import opportunities? Does this follow through from the margin that we had in the fourth quarter, with lower volumes? So, how do you get to this flat EBITDA in this period? Just wanted to understand how you constructed the rationale behind it.

If you look at the guidance for the fuels distribution business in 2006 (sic) and you take the midpoint of the guidance, you're going to see a slight increase on the EBITDA numbers. And basically, the range of the guidance that we are providing for 2016 it has a potential downside that covers all the instability in the macroeconomic scenario that we are going through in Brazil.

But on the other hand, it provides you with an upside that includes all the other opportunities that may occur during the 2016 year, including imports, including a potential price increase by Petrobras, a potential tax increase. So, all the other opportunities that we may have when going through 2016, it's already covered in the high end of the guidance.

That said, important to remind this is a preliminary guidance, because the budget process for Raizen, as you know, is not finished yet. So, we will confirm this guidance on the next conference call.

But my question is, do you think it's sort of maintaining the same margins that we're seeing right now and with lower volumes? Is that more or less the --? Because I'm working with the midpoint of the range, which is as you said a little bit above this 2015. So, is this the best way to go about it?

It's about right. I'd just remind that the fourth quarter unit margins does not reflect the average year unit margins. There is a hike on the margin on the fourth quarter by seasonal effects. So, if you make the calculation using the midpoint of the guidance, you're going to see that margins would be around stable.

Okay. Perfect. Thank you.

Juan Tavarez, Citigroup.

Just two questions on my side. The first one is regarding your cash flows. As you begin to generate this better cash flows, can you tell us how you plan to prioritize the use of that cash regarding CapEx, leverage, dividends? How do you expect to spend that incremental cash flow?

And second, just to get your overall perception on what's your take on the potential developments in Brazil on fuel prices and overall taxes across the businesses and products you produce?

Well, starting with the cash generation, the priority for this year 2015, as we shared with the market at the beginning of the year and we followed that up across the calls, it's really deleverage the Company. That we really achieved by the end of the year, with 2.5 times net debt to EBITDA.

So, if you look at it long run, our target it's really to go a little further down with this debt leverage, to 2 times EBITDA. So, by the end of the year 2016, we expect to be around 2.3 times EBITDA and continue going into that direction in deleveraging the Company.

With that said, with all the cash that we are generating mainly in Raizen and Comgas, we may decide to pay dividends as we did this time. But also, we have, as you well pointed out, the option of better manage the debt portfolio that we have, not only on the operational companies level but also at the holdings company level, that are less efficient in terms of tax.

With that, just to remind that we don't have any liquidity problems and we don't have any kind of leverage problem. So, it's really a choice of how to better balance the payment of the current debt and deleverage the Company even further, or to pay dividends to the shareholders.

Okay. Thanks.

Talia Fernandez, Credicorp Capital.

Under your earnings release on page number 14 under the IFRS accounting, you reported EBITDA for more than BRL1 billion. Compared to last year's figures, it's like almost two times the amount you reported on 2014. What's the hike? What's the reason the Company reported such growth?

Talia, I'm sorry. We couldn't get your question. The call is breaking up. Can you please repeat?

Yes. In your earnings release on page 14 under the IFRS accounting, you reported BRL1.2 billion in EBITDA. Compared to last year figures, it's almost two times the number you reported in 2014. Where does the growth come from?

Joao Arthur is the finance director. So, he will take that question.

Talia, this is the statutory figures for Cosan SA. We have a number of one-time events that are listed in the same report, and that's basically the reason for the improvement at the Cosan SA level.

And Talia, this is Phillipe, IR Manager of Cosan. Just to give you a better sense here, it's better for you to analyze the pro forma figures of the Company, and specifically on the release you can see each segment statement. So, you can see how the businesses are performing.

And then, you will do the consolidated figures, which actually you can see on the same earnings release, on page 4. You'll see segment by segment all the results and the performance of each business, and that will give you a better sense and a better analysis of the Company's performance.

Okay. Thank you.

(Operator Instructions) Juan Tavarez, Citigroup.

Just to follow up on the second question I had asked, if you can just give us your sense on the potential developments locally in Brazil on fuel prices and if you foresee any potential tax hikes or tax movements within the different businesses?

And maybe if I can follow up with a second question there on, in the other businesses when you were discussing in your slides, you mentioned that you had a BRL300 million gain due to a severance action. Could you just explain that a bit, because I'm just surprised that it's a gain. What exactly was the event that took place?

I'll go through the fuels question, and then I will turn to Joao to get to the second question.

What we are pointing here -- what we have as of now in our plans for next year on the fuels prices it's really stable prices for both gasoline, ethanol, and also diesel. So, we are not including in our plans for next year any fuel prices increase from Petrobras.

The same for any tax increase.

We realize that there is a potential out there to increase both of them, both prices and tax, but we have not included in our plans so far. So, the guidance that you see for 2016 does not include this potential upside.

Juan, this is Joao Arthur. The Company has moved in the past a number of legal actions against the federal government, seeking indemnization from losses we had with the price controls that the government placed on sugar and ethanol. I'm talking about the 1980s into 1990s. So, this is very long time ago.

And one of these actions we had a favored decision to the Company. This happened during the second part of 2015, and we recognized that. Net of the success fee and the lawyer fees that we paid to our lawyers, we recognized BRL268 million. It's important to notice that this is a non-cash event. We're probably going to see the cash only in 2017 or 2018.

Great. Thanks. Very clear.

Alexandre Falcao, HSBC.

I just wanted to clarify the derivative gains that you guys had this quarter. I understand this is a cash event. But looking forward on, you probably renewed your hedge on the [perp]. I just wanted to know if we're going to see something like that as a cash generation or a cash consumption? When is that -- when's the next hedge comes due? It's last quarter of 2016? It's a different time frame? I just wanted to know if we're going to see -- if and when we're going to see a cash effect like that?

Falcao, 100% of the Cosan debt is hedged, the principal and the interest. The gains we had, we had from the liquidation of certain derivative instruments. We had these in the first quarter. We had these in the fourth quarter. And we continue to have 100% of our debt hedged.

But it all depends on where the exchange rate goes to see if we're going to have again favor or negative, gain or loss, on this.

So, answering your question in a simple way, yes, we are hedged. We could have gains, but it all depends on what happens to the exchange rate.

I'm not concerned on -- and that I understand. I just wanted to understand if this is a yearly hedge that you guys just put in November? So, it's for next November? Or, if FX goes to BRL5 two months from now, you're going to see this next quarter as an impact of a gain on cash and operations?

For the (inaudible), we do in 2015 -- we used a short-term hedge. And right now, we are hedged again, and it goes until the middle of March. But we're going to keep hedging it. There's no -- it's not our intention to not have the (inaudible) or the other debts unhedged.

Okay. That's clear. Thank you.

This concludes the question-and-answer session for investors and analysts for today. I'd like to invite Mr. Nelson Gomes to proceed with his closing statements. Please go ahead, sir.

Well, once again, thank you for attending the Cosan conference call this quarter. Just a friendly reminder that we will have our Cosan Day here in Sao Paulo here in March 21st and in New York in March 23rd. So, I'll see you all then.

Thank you.

That does conclude Cosan's audio conference for today. Thank you very much for your participation, and have a good day.