Cosan SA (CSAN) 2017 Q3 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 Third Quarter of 2017 Results Conference Call.

Today with us, we have Mr. Mario Silva, CEO; Mr. Guilherme Machado, IRO; Mr. João Arthur Souza, CFO; and Mr. Phillipe Casale, Investor Relations Manager of Cosan S.A.

We would like to inform you that this event is recorded. (Operator Instructions) The audio and 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 [sic] [Securities Litigation Reform Act of 1995]. 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. Machado. Mr. Machado, you may begin the call.

Good morning, everyone, and welcome to Cosan S.A.'s third quarter '17 results conference call.

Before starting the presentation talking about each business line and consolidated results, I would like to remember a shareholder movement that happened at Comgás S.A. level. As already announced through the material fact last month, Shell decided to exercise its production it had against Cosan Limited CZZ dated from 2012, converting into stake an income guidance of approximately 17% into shares of Cosan S.A. CSAN3 shares.

This transaction, as you know, is subjected to the antitrust commission here in Brazil, CADE. And when completed, CZZ will receive 21.8 million shares of Comgás and deliver to Shell 20.3 million shares of Cosan S.A. CSAN3 shares, plus 2 cash installments.

Also worth to remember that on October 10, CZZ offered to Cosan S.A. the possibility to acquire this stake in Comgás at the same conditions agreed between Shell and CZZ. This operation was analyzed and approved by the independent board members of Cosan on October 16. And when approved by CADE, transactions will happen simultaneously.

As a consequence, the stake of 63% that Cosan S.A. holds in Comgás today will increase to almost 80%.

And finally, on this topic, in last Tuesday, November 7, Comgás declared a dividend in the total amount of BRL 700 million. And if the transaction -- and when the transaction is approved, the mentioning amount will be adjusted for the payment for Shell of these dividends.

So now let's move forward to Chart #4 talking about Raízen Combustíveis' results. In this quarter, the fuel market was impacted by important events, such as the tax adjustments on the main products, and we saw more often price adjustments practiced by Petrobrás. Additionally, we see some signs of recurring some segments of the economy, with improvement in industrial production, increasing in sales of light and in vehicles -- in light and heavy vehicles, and also the reduction of interest rates. According to ANP, diesel sales in the country increased 2% in the quarter.

In the Otto cycle, there was a drop of 1% in sales. However, when measuring, the equivalent gasoline sales were stable compared to the same period in 2016.

Looking specifically to our results. Raízen Combustíveis, once again, performed above the market average and grew 4% in the total volume sold compared to the same period last year, while the Brazilian market only grew 1% in total volume sold looking for the sales in the ANP base.

In the Otto cycle, our total volume sold grew 2% compared to the third Q of '16. The same comparison in gasoline equivalent showed an increase of 3% as a result of higher gasoline sales, which grew 5% against 8% drop in the ethanol sales. The diesel sales grew 8%, driven by the increase in the demand for B2B customers, mainly related to agri industry.

Aviation dropped 3% in the volume compared to the same period of last year, reflecting the reduction in the number of departures of main customers. However, compared to the second Q of '17, there was an increase of 7%.

Moving to results. Adjusted EBITDA reached BRL 894 million in the quarter, an important 21% increase compared to the same period last year. This growth continues reflecting the effectiveness of our supply strategy in product and marketing as well as an increase in sales volumes.

In this quarter specifically, we also saw an important gain in inventories obtained by price dynamics in the period.

It's worth to mention that we treat these inventory gains and losses when happen as a recurring part of the business since they are part of the supply and marketing strategy.

The adjusted EBIT increased 22% in the quarter, reaching BRL 724 million.

Looking now to the last quarter of this year, the expectation that we are going to have an adjusted EBITDA similar to the fourth quarter of 2016 and in line with what we have for the guidance of the year, close to the top of the range.

And just remember that since July, we have seen almost daily adjustments in diesel and gasoline prices practiced by Petrobras, as I have already mentioned. And at the end of the year, the ethanol dynamics of price volatility can impact the results, and we're going to monitor these effects throughout the final quarter of the year.

Moving to the CapEx. The investments totaled BRL 185 million, a decrease of 3% compared to the third Q of '16. We closed the third quarter of '17 with 6,138 Shell services stations and net additions of 70 stations in the quarter, in line with the strategy of expansion focusing on finding best location and assets with the average throughput in line with the current profile of our network.

Now moving to the Chart #5, let's talk about Raízen Energia. The weather that was drier in the third quarter of '17, which is the second in the crop year, make it possible to improve the harvest and crushing, which reached 28.3 million tons of sugarcane in the third Q '17, a 10% growth compared to the third Q '16. The sugarcane productivity reached 10.3 tons of TSR per hectare, reflecting the lower concentration of rainfalls in the period, which negatively affected the tons of cane per hectare, which was partially offset by the improvement in the TSR. Raízen production mix in the period was 57% dedicated to sugar compared to 59% in the third Q '16.

It's important to remember that this mix is a reflection of the frequently analysis of the profitability by product that is in the current price levels. The anhydrous and hydrous ethanol are already generating more profitable results compared to sugar, which create opportunities for the optimization of this mix.

The increase in production, coupled with the company's commercialization strategy, enable our higher sales volume in the third Q.

Looking for each product specifically. Sugar sales in the third Q '17 grew 17% with emphasis in the foreign market and the higher commercialization of owned products. The average sales prices in reals, already adjusted by the hedge account effect and currency hedge on sugar prices, were 5% higher than in the third Q '16.

Looking for ethanol. Sales volumes were 27% higher than in the third Q '17, with more relevance in the domestic market, where the volume was 70% higher than the same period of last year.

As in sugar, there was an increase in sales of owned products. The average ethanol price was slightly lower than prices practiced in the same period of last year, but in line with the market looking for the results basis.

And talking about energy, the higher availability of the gas provided as a function of higher crushing in the period had a greater production of electricity, which together with an increasing product trading activity generated 28% increase in the third Q '16. Average electricity prices grew 28% (sic) [38%] and reached 261-megawatt hour in the period -- reals per megawatt hour in the period.

Before talking about the EBITDA, I would like to highlight, once again, the results from Raízen team efforts in terms of cost and operation efficiency. The evolution of the unitary costs of owned product in equivalent sugar was 8% lower, reaching BRL 582 per ton in the third Q '16 due to the continuous efforts on efficiency in both agriculture and industrial operations.

In addition to this reduction, we -- is also explained by the lower cost of CONSECANA index, on average 8% lower, an indicator that, as you know, affected the cost of land leasing and sugarcane from suppliers, and also the greater dilution of fixed costs given the higher volume sold.

Even excluding the effect of CONSECANA, the unitary costs was 3% lower compared to the third Q of '16.

Moving to the adjusted EBITDA graph. In order to facilitate the understanding of -- and comparability of Raízen Energia results, since last quarter we have incorporated the effect of the foreign currency hedge designated for sugar exports into the EBITDA, in addition to the usual adjustments that you have been following, that is the adjusted EBITDA came to reflect the more accurate operation of cash generation price.

Another important point is that since the previous quarter, the second quarter of '17, all new derivative instruments designated for the protection of sugar exports have been accounted into hedge accounting, so that in the future all instruments protecting sugar exports will be normalized in EBITDA.

Talking about the numbers. Adjusted EBITDA reached BRL 1.4 billion in the third Q '17, 50% higher than the same quarter of the previous crop, due to higher sales of owned products and better sugar and electricity prices in BRL as well as the lower unitary costs of sale. In this quarter, the average foreign exchange rate for sugar exports was BRL 3.86 per dollar versus BRL 3.14 of average foreign exchange in shipment. As a result, we had a positive effect of BRL 296 million, which was recognized in the financial results until the closing of this quarter related to the foreign exchange hedging instruments used to establish the revenues in reals.

It's worth to mention that the basic assumption of Raízen hedging policy is to protect the commodity and current exchange rate always looking at the prices in reals.

The adjusted EBIT per TSR increased by 53% in the quarter for the same reasons that I have already mentioned.

Now let's move to the sugar hedge graph. We reached almost 90% of the total volume to be exported in the '17/'18 crop, protected an average price of BRL 0.66 per ton, higher than we have seen in the spot market.

In compliance with our hedging policy, we have a lower volume when compared with the previous quarter for the upcoming '18/'19 crop.

As you know, our strategy is to protect cash flow. We're talking about hedging and seeking to attenuate price volatility to the business. We're focused on increasing efficiency in our operations and manage invested and working capital, continuously seeking better returns.

Moving on to the last graph, CapEx. Investments for the period totaled BRL 423 million. Here, just regarding the disbursements for the acquisition of the 2 Tonon mills of -- the acquisition that Raízen made of the 2 Tonon mills totaling BRL 823 million. So this increase of 12% is mainly due to a higher investment in biological assets, given the increase in harvest and, as a consequence, higher expenses in land treatment and renewal of sugarcane fields and acceleration of mandatory investments in projects related to health, safety and the environment as well as sustaining.

Completing the Raízen section, I'd like to move to Chart #6 talking about Comgás. As you know, since Comgás already presented third Q '17 results last Wednesday, let's go straight to the highlights. This was another quarter of expansion in sales volumes, and I highlight here sales volumes growth in all segments.

With a gradual recover of activity in the main sectors, in addition to the new customers, there was growth of 5% in the industrial volume. Also, residential and commercial segments presented a 5% volume growth, reflecting the connection of more than 101,000 new homes and 810 new business in the last 12 months.

As a consequence, the normalized EBITDA increased by 6% compared to the same period last year due to higher natural gas sales and the correction of the adjustment of margins for inflation in May this year.

The IFRS EBITDA dropped 6%, reflects the return of the regulatory current account in approximately BRL 9 million in the third Q '17, which closed the quarter with a total balance of BRL 259 million in favor of declines.

Comgás invested BRL 126 million in this quarter, 20% higher than the same period last year, and in line with the guidance for the year.

Moving to Chart #7. Let's talk now about Moove, our lubricants business. As we saw in both Raízen Combustíveis and Comgás results, the best indicators of the country's economic activity also boosted Moove's figures in the third Q '17. We grew 11% in volume sold in Brazil, once again above the market average, reflecting the company's commercialization strategy focused on increasing the customer base and participation of the automakers' marketing in the country. We also had good sales performance in the other countries that we operate, also driving 11% growth in total volume. EBITDA in the third Q reached BRL 44 million 23% higher than the same period last year due to the higher volumes and a better sales mix.

Looking to the right side of this chart, let's talk about the Cosan corporate expenses. General and administrative expenses totaled BRL 40 million, slightly above the third Q of '16 and in line with the expectations for the year. Other operating expenses composed of legal expenses and consultant services totaled BRL 13 million in the third Q of '17, as there was a lower concentration of expenses in the period.

Moving now to Chart #8, let's talk about the consolidated results of Cosan S.A. on a pro forma basis. The improvement of operating performance in all business, as we have discussed, boosted the pro forma adjusted EBITDA growth to 30% in the third Q of '17, which reached BRL 1.6 billion. Cosan represented a net income of BRL 500 million in the quarter, 53% above the third Q '16.

When applied in same adjustments to the EBITDA, the adjusted net income more than doubled in the current period compared to the same period of the previous year, reaching BRL 540 million compared to BRL 188 million in third Q '16. The lower financial expenses in the quarter contributed to the strong growth of the net income in the period.

Pro forma CapEx reached BRL 450 million, 3% higher than the same period of the previous year, in line with the investments expected for the year.

And noticeably, the pro forma free cash flow to equity showed a cash consumption of approximately BRL 520 million in the period, which we'll explore beginning -- moving forward.

Moving to Chart #9, let's talk about the consolidated net debt and leverage of Cosan.

The pro forma gross debt, that is including 50% of Raízen debt, dropped 3% in the third Q of '17 compared to the previous quarter. This likely reduction is mainly explained by the pre-spun amortization of debt in both Raízen Energia and Comgás.

Pro forma net debt, which include bonds we've preferred to shareholders, ended the quarter at BRL 9.8 billion, up 2% compared to second Q '17. This effect reflect the reduction of 9% in the company's cash and cash equivalent balance, which were basically impacted by the cash disbursement in the acquisition of the 2 Tonon mills by Raízen Energia.

But even after the conclusion of this acquisition, the company pro forma leverage remained stable at 2.1x pro forma net debt to adjusted EBITDA, both taking into account the numbers on a reported basis when normalized by the current account effect in Comgás.

It's important to remember that there is a seasonality in pro forma leverage since the working capital cycle in Raízen Energia tends to oscillate throughout the crop year. The pro forma average cost of debt increased in the quarter to 105% of CDI. If we consider the account number that is excluding Raízen, the average cost goes to 110% of CDI.

It's worth mention that we have fixed cost debt; which is now compared to a lower CDI.

Looking for the free cash flow to equity, let's highlight the main effect. First, a 35% drop in operational cash flow since in the third Q '16 comparison basis, consider a positive impact related to the working capital dynamics in the fuels distribution business. Second, a high consumption in the cash flow for investments mainly impacted by disbursement of BRL 378 million in the third Q due to the acquisition of Tonon by Raízen Energia and a strong comparison basis since the third Q '16 included, as you remember, the gains from the sale of STP business in Raízen Combustíveis. And lastly, in finance, in terms of quarterly comparison was higher cash consumption explained by the positive net effect in the third Q '16 regarding Cosan debt restructuring process, which include the insurance of the 2027 bond with an additional funding of $150 million in the period. This combined effect resulted in the free cash flow to actually cash consumption of BRL 520 million in the period.

Now let's move to the last chart of the presentation and talk about the guidance.

As we showed in our earnings release before, we're operating the guidance for 2017 year with the specific adjustments that I'm going to highlight here.

First, talking about the business lines, and then talking about the consolidated period. At Raízen Combustíveis, we have not changed anything. After the first 9 months of the year, we expect to deliver the EBITDA within the guidance range, targeting the high -- the top of the range. But once again, price volatility in the quarter is something that we're going to monitor, and this is the best estimate that we have now, targeting to reach top of the guidance.

Speaking in the Raízen Combustíveis, and also remember that the guidance year follows the crop year, we remain confident in delivering the EBITDA within the guidance range for the crop year despite the challenges related to the scenario of sugar prices in the international market. With the acceleration of production in the third Q '17, the correction for the crop year is pointing to the high range of the projection.

And also, the expectation of electricity commercialization will also be higher due to the optimization of production and the greater trading opportunities in this crop year.

Lastly, we revised the CapEx projection for Raízen Energia, specifically due to the inclusion of the maintenance crops -- the maintenance investments in 2 mills of Tonon Group. It's worth to mention that this guidance do not include the amounts disbursed for the acquisition of these 2 mills.

For Comgás, as it was already presented by the company last week, the volume projection, excluding thermo and normalized EBITDA, were updated. The increasing economic activity has enabled Comgás to distribute a larger volume of natural gas, which combined with the efficiencies in the business has made the expectations of normalized EBITDA also increase to the range of BRL 1.67 billion to BRL 1.73 billion.

The same applies to Moove. After 3 quarters of solid results, we revised the EBITDA guidance upwards to the range of BRL 160 million to BRL 180 million.

Finally, we're adjusting the range for the consolidated pro forma of Cosan as a consequence of the adjustments in the business, which now range in the EBITDA figures from BRL 4.9 billion to BRL 5.3 billion for 2017, reflecting the better performance of the business, as I have already mentioned.

With this, I conclude the presentation. Once again, thank you for joining us for the conference call, and I turn over to you guys for the Q&A section. Thank you.

(Operator Instructions) Our first question comes from Luiz Carvalho, UBS.

Just a quick one following up the Portuguese call. Well, we haven't seen Comgás delivering quite good results over the past, let's say, couple of quarters and even more than that. And I wonder [in lieu to the tariff acquisition], I mean, on the regulated companies in the electricity sector, and more recently, with the same regulator that Comgás assessed here in São Paulo, suggest you had a quite flat, let's say, [execution] during the last thermo deal. Is there any idea that you can provide to us in terms of what you expect in terms of the core acquisition and for the -- now that we have a new director appointed to be in charge of the tariff revision?

And second question, I'm doing some quick calculation here on Raízen Combustíveis. When we analyze the sort of potential gain -- starting inventory gain that you had in the quarter, we come something close to BRL 120 million, which would leave your EBITDA margin greater to close to BRL 117 per cubic meter. Is that something that we can look forward in terms of sustainable margins? Or is there any other thing that you should -- you can flag to us?

Luiz, thank you for both questions. So first, talking about Comgás, and I'm not trying to be creative in this answer here, what happens is that as Comgás has already stated in their earnings call, they're waiting for the process with the agency and their official statement regarding the process of the cycle revision, which is something that we do not have any visibility when it's going to happen. So the companies prepare for additional discussions whenever the agency is prepared for that. So important to highlight in this sense that although we have this best process being conducted by the same regulator, we understand that is a totally separate discussion. And the business and industries are different. And I think that when we're solicitated to join the process, we're prepared, and nothing more creative in this sense.

Talking about Raízen Combustíveis. As we have been discussing with the market supply, the import process by Raízen Combustíveis is part of the supply strategy now. So inventory gains and losses, when it happens, we consider to be normal course of the business, which is something, to be honest, that we cannot create a rule of thumb or create something as an average that we can guide the market. It's going to happen when we have opportunities. And again, this is going to be part of our supply strategy. So it's something that is happening in order to supply the shortage that we have in our network as part of the business.

Yes. One related to the tax increase during the quarter that in all calculation led to a, I don't know, BRL 120 million gain, but that's okay.

(Operator Instructions) That concludes the question-and-answer session for investors and analysts. I'll turn the conference over to Mr. Machado to proceed with his closing statements.

Okay. I'd like to thank you now for joining the call, and we'll talk to you guys in the next earnings conference call. Thank you.

That does conclude Cosan's third quarter of 2017 results conference call. Thank you. Have a nice day.