Cosan SA (CSAN) 2016 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time we would like to welcome everyone to Cosan SA's first-quarter of 2016 results conference call. Today with us we have Mr. Mario Silva, CEO; Ms. Paula Kovarsky, IRO; 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 (Operator Instructions). The (inaudible) slide show of this presentation are available through a 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 (inaudible) in the future.

Investors should understand that general economic conditions, industry conditions in other operating sectors could also affect the future results of Cosan's and could cause results to differ materially from those expressed in such forward-looking statements. Now I will turn the conference over to Mrs. Paula. Mrs. Paula, you may begin the call.

Good morning, everyone, and welcome to Cosan SA's first-quarter 2016 teleconference. As announced on April 19, there were changes in the Company's management structure.

Nelson Gomes, who was CEO and IRO of Cosan SA, stepped down to focus solely on his role as CEO and IRO of Comgas. Mario Agusto da Silva joined the Group CEO of Cosan SA and the IRO role was taken over by me, Paula Kovarsky, in addition to my role as [CCZ IRO]. Besides me and Mario, Joao Arthur Souza, CFO, and Phillipe Casale, IR Manager of Cosan SA, are here with us for this conference call.

On slide number 3 we outline our business units for reference and we can go straight to slide number 4 where we present the results of Raizen Combustiveis, our refuse distribution joint venture with (inaudible).

Following the trend of previous quarters, our sales volume outgrew the market average. This growth reflects the maturation of a strategy implemented around two years ago focused on the growth of the distribution network through the conversion of independent service stations, mainly unbranded.

Sales volume in the in the Otto cycle increases by 1% compared to the first quarter of last year and this compares to a market contraction of 2% supported by the addition of 380 new stations to our network over the past 12 months.

Raizen's digital sales grew 4% in the period as we added B2B contracts and due to the anticipation of the sugarcane crop. This compares to a decline of 6% of the market.

Adjusted EBITDA reaches BRL590 million, growing 7% versus the first quarter of 2015 and the first quarter of 2015 was positively affected by BRL35 million worth of one-off impacts, BRL46 million of diesel and gasoline price hikes and the negative impact of BRL11 million from asset divestments.

In the first quarter of 2016 one-offs totaled BRL11 million composed of a positive impact of BRL5 million from asset divestments and a negative impact of BRL16 million from expenses with internal restructuring.

This quarter was also hit by the aviation segment due to lower sales volumes, lower oil prices and exchange variations as well as by seasonal marketing expenses of BRL20 million. Note that those two are not included in the adjustment.

Moving to slide number 5, let's talk about the sugar, ethanol and cogeneration business of Raizen Energia. Starting with the first quarter, which corresponds to the last quarter of the 2015/2016 crop year.

The highlights of the quarter was the successful anticipation of crushing 2.8 million tons of sugar cane. This was an important achievement as we managed to anticipate the crushing in 13 out of 23 operating mills concluding the inter harvest maintenance in two months, which is half of the usual time, with no issues at the startup of the operations in the mills.

The climate was a help, of course. But the ability to anticipate the crushing is an example of the increased focus (technical difficulty) guide.

The first hint we gave to the market in the beginning of the crop year pointed to an EBITDA ranging between 2.6 and 2.8 (technical difficulty) above the result of the previous harvest mainly because of better sugar and ethanol prices in addition to the efficiency gains and cost control initiatives on top of the crushing anticipation.

It is important to remember that in line with Raizen's hedging policies, the positive impact of the real devaluation that favored the EBITDA of sugar exports during the quarter and during the harvest had a counterpart in the financial results.

Now talking more about our efficiency and cost control initiatives. We have been showing the evolution of costs regarding planting and treatment, the [CCT] which is cutting, loading and transportation of the sugarcane and industrial cost. Now we translate this impact more clearly into results measuring (inaudible) differently.

The cash cost of production increases 8% excluding the increase in constant (inaudible) therefore lower than inflation in the period despite the lower amount of TRS and sugarcane, longer 2015/2016 crop season and crushing anticipation.

The CapEx was 24% lower compared to the 2014/2015 crop and within the guidance reflecting lower investments in sugarcane [field renewal] and the conclusion of expansion projects. And the TOTEX, which is essentially the sum of maintenance (inaudible) and OpEx, had a reduction of about BRL26 million in nominal terms or almost BRL150 million if we look at the comparison in real terms.

Turning now to Comgas on slide 7, this is our Natural Gas Distribution business in the state of Sao Paulo, recalling that Comgas reported its results on May 10. The main highlight of this quarter was with the growth of the residential volume. This segment was negatively affected by the hydro crisis in the state of Sao Paulo.

Water shortage came to an end and, most importantly, the state withdrew the incentives to reduce consumption which led to a reduction in the per capita consumption of gas. Showers represent some 60% of gas consumption in residential segment.

The recovery in unit (inaudible) consumption coupled with the connection of 115,000 new clients over the last 12 months resulted in a 23% growth in sales compared to the first quarter of 2015. The commercial segment also grew 8% as we connected the [1,100] clients over the last 12 months.

The industrial sector instead continues to suffer on the decline of investor activity, falling 12% compared to the first quarter of 2015. But we have some specific events that explain the greater contraction compared to GDP. The migration of a textile industry to biomass, the decline of consumption in steel plants following the sharp drop in construction and auto maker's activity.

Comgas continues to work on new customers, connections and new applications for this segment, but the macro scenario remains the main driver here. The normalized EBITDA rose 8% compared to the first quarter of [2015] on improved sales mix and tariff adjustments.

The IFRS figure doubled compared to the same period last year due to the sharp reduction in the cost of gas and consequently the recovery of BRL195 million of the regulatory current account contributed to higher cash generation.

Just to remember, the current account is a clearing account between Comgas and the regulator regarding the difference between the price base for the gas and the price of gas embedded in the calculation of the tariff. The balance is adjusted by (inaudible) rate and amortized annually through an adjustment in the tariff up or down depending on whether the balance is negative or positive for the Company.

In other words, the gas is essentially a pass-through and this is why we report and focus our discussions on the Company's normalized EBITDA. And as mentioned, the drop in gas purchase prices accelerated the amortization of the current account which is now positive, that is in favor of the consumer. Comgas invested BRL94 million in the quarter of which 75% on network expansion, 268 kilometers and 22,000 new customers.

Let's go to slide 7 (sic - see slide 8). Starting with Lubricants, which include our operations in Brazil, Paraguay, Uruguay and Bolivia besides England and now Spain. Volumes increased 8% compared to the first quarter of last year mainly in finished lubricants in Brazil.

Speaking about Brazil, the market fell 9% between periods because (inaudible) lubricants has been gaining major accounts, especially automakers, which means that (inaudible) leads manufacturers with mobile lubricant and their recommendation to use the product later on. Today we have 48% market share in light vehicles, 39% market share for trucks and 89% for motorcycles.

The EBITDA rose 10% compared to the first quarter of last year reflecting the growth in sales volume, better product mix and international operation results translated into the Brazilian real.

About [radar], EBITDA declined due to the lack of property sales in the period and no change in market indexes used to derive the FMV, the fair market value of the portfolio, both are non-cash effects.

Speaking about the corporate, general and administrative expenses totaled BRL42 million in the quarter impacted by higher personnel and consulting expenses as well as inflation in the period. The line order expenses decreased (inaudible) last year's figure was negatively affected by expenses related to the merger of Rumo-ALL.

Moving to slide 9, we represent Cosan SA's consolidated results on a pro forma basis considering 50% stake in Raizen. The adjusted EBITDA grew 15% year on year and reached BRL1.2 billion in the first quarter of 2016 mainly on Raizen Energia's positive outlook.

We reversed the BRL44 million loss in the first quarter of last year to BRL249 million net income in the first quarter of 2016 as a result of Raizen Energia's operational improvement and the recovery of the regulatory current account.

Which offset the increase in financial expenses which grew due to the higher interest rate and the fair value loss non-cash impact of a put option of two Rumo shareholders invited to a right to convert their Rumo shares into [season 3] shares in accordance with the mature affect dated April 28. The average debt cost on a pro forma basis did not change remaining at 92% of the CDI.

We announced yesterday BRL290 million worth of dividend payments totaling BRL0.71 per share. The record date is May 15 and shares will trade ex dividends on May 16. If we adjust for this payment net debt to EBITDA would be 2.2 times.

Our goal is to continue deleveraging for the medium long-term. We believe two times is a comfortable level appropriate to the portfolio of assets that we have. In the next two quarters, however, we will probably see an increase in this ratio due to Raizen Energia's working capital cycle seasonality decreasing towards the end of this year and beginning of next year when we have finished the 2016/2017 crop year.

Let's go to slide 11, the last slide of the presentation, to talk about guidance. There was no change to the guidance presented last quarter, yet Raizen's numbers were preliminary at the time as planning and budgeting cycle follows the crop year.

Specifically on Raizen Energia, the guidance indicates the crushing of 60 million to 64 million tons of sugar cane and an EBITDA ranging between BRL3.3 billion and BRL3.6 billion implying limited upside compared to the BRL3.5 billion adjusted EBITDA of the 2015/2016 crop year despite the increasing sugar prices.

A few points to consider here. As we said, the anticipation of the crushing generated an EBITDA of approximately BRL150 million, that increased the EBITDA of last year's crop. In the 2016/2017 crop we hedged sugar sales with an exchange rate of about BRL2.9 to the dollar and the effective exchange rate when we shipped the products was higher.

As I mentioned in the previous slides, this shipment exchange rate affects the EBITDA while the exchange rate we fixed through financial instruments is a real proxy of the economic impact or the cash generation of Raizen Energia.

The 2016/2017 crop guidance assumes a BRL to the dollar of approximately 4 and this exchange rate mostly established through financial instruments guarantees the economic or the cash result of Raizen Energia.

But the EBITDA at the end of the day reflects the effective exchange rate at the time of the sugar shipment. If we look at the current exchange rate we would have downside to the EBITDA metrics but no impact to the estimated cash generation.

Our decision for now is not to change the guidance as we are in the very beginning of the season and we cannot ignore not only the volatility of the uncertainty on the exchange rate but also the climate issue. Climate conditions were favorable in the previous crop year and we still don't know whether the situation will be exactly the same.

This concludes our presentation today. And I would like to open to the Q&A session.

(Operator Instructions). Alexandre Falcao, HSBC.

Actually I have two questions. The first one is regarding your debt planning. Since we are seeing a huge move on the long-term interest rates, a downtrend, and the fact that you guys are levered and less than efficient on the [cost off] of financing. Is there any plans to take advantage of this and go back to the market and maybe try to redeem some of their more expensive debt? That is the first question.

And the second question is, you have (inaudible) [Zometo] on the news today talking about looking at infrastructure projects. I just wanted to know if that is going to be done in the CZZ level or in the Cosan level. And which would be those infrastructure projects that you guys would be interested in? Thank you.

Hi, Alexandre, this is Mario speaking. Yes, you are right in terms of the market as a consequence of the change in government. The market has been improving for the Brazilian corporates on the debt side. We have been following and actually our bonds, they have been trading especially well in the past weeks.

And for sure we've been following, we have been following the market and in general we are always looking to opportunities in the debt to capital markets. At this moment there is nothing concrete that we are looking. But we've been following the dynamics of the market to see if it at any point makes sense given the debt profile that we have.

Just remember we have the BRL bond maturing in 2018, we have a US dollar bond maturing in 2023, and we have the [perp]. So, we keep looking and following the market to see if a good opportunity might show up in the coming weeks.

But the answer at this moment there is nothing concrete but we keep following the market. It is very recent, the improvement in the market. So probably we will have to wait a couple weeks more or at least a couple months more to see if that trend regarding the Brazilian corporates will remain. I will pass to Paula --.

And just on that -- a quick follow up on that. The first one would be the debt in the Comgas level that you guys were planning to do and of course the market did not allow it. Is that the -- sort of the -- if those conditions are confirmed, could we assume that that is going to be the first move that you guys are going to do? Thank you.

Look, that was the -- in the last time that Cosan went to the market that was the idea. But again, there is nothing concrete that we can talk about right now. For sure one of our priorities is to try to improve the tax efficiency because I mean in terms of where the debt is located at this point is not the ideal vehicle.

We know that and we keep looking for alternatives and opportunities to improve that efficiency. But I mean -- sorry, maybe we don't have nothing concrete. The last time that we went to the market the idea was to -- the new bond would go together to the gas division, but again (technical difficulty).

We'll do it through CZZ, but that is as much as I can say for now, okay.

Okay, perfect, thank you.

(Operator Instructions). (Technical difficulty) to Ms. Paula Kovarsky for her final consideration.

So, thanks again for attending the conference call. We'll see you next quarter. Have a nice weekend.

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