Cosan SA (CSAN) 2018 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Cosan SA Third Quarter of 2018 Results Conference Call. Today, with us, we have Mr. Phillipe Casale, Investor Relations Executive Manager; and Mr. João Souza, Head of Finance. We would like to inform you that this event is recorded. (Operator Instructions) The audio and slideshow of this presentation are available through live webcast at ir.cosan.com.br. These slides can also be downloaded from the webcast platform.

Before proceeding, let me mention that 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. Phillipe Casale. Mr. Casale, you may begin the call.

Good afternoon, everyone, and welcome to Cosan SA Third Quarter 2018 Earnings Conference Call. I'd like to open this call by discussing our recent announcements. As you know, we are constantly analyzing ways to simplify our corporate structure in order to create value for shareholders. With this in mind, on October 24, we released the material facts to inform the market that we had initiated studies to assess the feasibility of incorporating Cosan Logística into Cosan SA. Immediately after this announcement, we were asked to address the lack of details regarding the expansion and potential accuracy of this proposal. We acknowledged that the lack of additional information hindered the market's understanding as to how this transaction would assist in the simplification process.

Out of respect for the interest and concerns of shareholders and investors, we decided to cancel this transaction. I'd like to emphasize here our commitment to best governance and transparency practice to any corporate action we take going forward.

Let's now move to Slide 4 to discuss the business results starting with Raízen Combustíveis. And before entering into Raízen figures, I would like to remind you that we concluded the acquisition of Shell's downstream assets in Argentina on October 1. Therefore, this operation had no impact on our 3Q '18 results. The distribution segment also faced some challenges this quarter. The remaining effects of the trucker's strike forced a temporary re-optimization of our supply dynamics, given the lower diesel import's attractiveness. Besides, we had also -- had the World Cup affecting consumption in July. This challenge demanded additional efforts from our team to again deliver above industry average results. Let's look at the numbers.

Total sales volumes was up 1.5% compared to the same period last year. The highlighting of the period was diesel, which continues to enjoy both GDP and above industry average growth due to the higher demand from other business clients, coupled with the new contracts signed over last year. Demand on the Otto-cycle remains below expectations driven by factors such as the high level of unemployment rate in Brazil affecting families' income and high prices at the pump, especially for gasoline, in line with the international oil prices and kerosene increases. In this environment, we saw again strong growth in ethanol consumption.

Sales volume in the aviation segment grew 9% in line with the sector's resumption. Adjusted EBITDA came BRL 683 million in 3Q '18, 26% higher than 2Q '18, but lower than the same period last year. Remind you that the 3Q '17 comparison basis is strong since it was positively impacted by inventory gains and also prices being adjusted more frequently by Petrobras.

Similar to what we did last quarter, we highlight that in 3Q '18, we had negative impact of around BRL 20 million, specifically related to the trucker's strike, which includes the impact of average diesel inventories and one-off logistics costs. As I mentioned before, despite several challenges faced in the quarter, once again, we delivered consistent results, sustained by our strong relationship with our customers' base.

Investment in the quarter came at BRL 188 million, including maintenance, conversion of new stations and renewal of existing contracts. We ended the quarter with 6.444 Shell branded stations, an addition of 300 -- 306 stations in the last 12 months and 84 in the quarter. Our expansion plan remains in line with the expectations for the year.

Now let's move to Raízen Energia on Slide 5, and -- this was the second quarter of the 2018-19 crop year. It was marked by rainfall volumes higher than expected, reducing the crushing by 14% year-over-year. The drier weather during the intercrop season impacted the sugarcane productivity index, which reached 9.6 kilos per -- 6 kilos of TRS per hectare and we continued to prioritize the ethanol production over sugar due to higher biofuel profitability and demand this year. Therefore, the ethanol mix reached 51% in the 3Q '18 versus 42% in the same period last crop year.

Let's review sales for each product, and we start with sugar here. As you can see in the chart on the right-hand side, sales volume came in 28% lower than 3Q '17. We concluded a few sugar storage projects in our mills, which provides us with higher flexibility and enables us to maximize the carry strategy for sugar. The average sales price in Brazilian reais came in 30% lower compared to the same period last year, following a sharp drop in commodity price.

The ethanol sales came in 8% higher compared to 3Q '17, driven by higher demand and increased production in the period. Average price improved 10% versus the same period -- the same previous crop year but was in line with the previous quarter.

Now moving to cogeneration. I would like to point out that starting this quarter, Raízen is consolidating the result of WX, or [W Shields], our energy trading company. This operation adds even more value to our portfolio by increasing our offering of integrated energy solutions. For this reason, we are now breaking down volumes between own volumes and resale on trading, likewise, in sugar and ethanol, as this operation results in revenue increase, but with margins substantially lower than the sale of energy generated by Raízen Energia.

As we've said, all volumes sold was 8% lower, reflecting lower biomass availability due to reduced crushing in the period. Before discussing EBITDA, I would like to comment on the quarter's -- the quarter's cost dynamics. Sugar equivalent unit cash costs, excluding (inaudible) effect, was up 9% affected by higher diesel costs, low agricultural yields and inflation in the period. Raízen's adjusted EBITDA reached BRL 641 million, a drop compared to the same previous crop year, mainly due to lower volumes in price of sugar sold. As we mentioned in our last conference call, our sugar and ethanol sales strategy this year is focused on the higher concentration of sales during the last 2 quarters of the crop year. While certainly sugar hedged, and we advanced our projections, leveraged by improved the prices in Brazilian reais throughout the quarter. For the current crop, '18, '19, we have nearly 100% hedge and an average price of BRL 50 centavos per ton. For the next crop '19-'20, we hedged approximately 30% to 35% of the total sugar to be exported with an average price of BRL 53 centavos per ton.

Finally, CapEx totaled BRL 465 million in the quarter, reflecting the higher investments in planting and renovation of sugarcane fields in line with our schedule for the year.

Let's move to Slide 6. Comgás released its results on Tuesday, so let's go straight to the highlights. Total sales volume, excluding thermal power, grew 9% with expansion seen in all segments. In residential and commercial, we maintained our focus on customer-based growth. In industrial segment, group sales performance was the result of renegotiation of negotiations to increase volumes in the current customer base. EBITDA normalized by regulatory current accounts grew 14% this quarter, reaching BRL 546 million, mainly driven by higher volumes sold. We ended the quarter with BRL 161 million balance in the regulatory current accounts recovered from clients, thus our IFRS EBITDA came in 60% lower due to the gas cost dynamics. Comgás gas totaled to BRL 139 million in 3Q '18, in line with the year's guidance.

Let's move to Slide 7 and start talking about Moove. Recent initiatives of our international expansion plan improved the sales performance in Brazil reflected a 4% growth of (inaudible) lubricant sales volumes. These are the sales volumes. The raw material for lubricant manufacturing dropped in this quarter. An improved sales mix in International operations result in BRL drove the 34% EBITDA growth, which came to BRL 60 million in 3Q '18. Now let's turn to the right side of this slide. General and administrative expense came in respectively, 19% and 16% lower than the same period last year. Other expense increased, but in line with expectations for the year. This item is composed of legal expense and various legal claims.

Moving to Slide 8 to present consolidated results of Cosan sales on a pro forma basis, considering 50% of high yield results. Cosan pro forma EBITDA came in 25% lower versus 3Q '17 reflecting our high yield result in the period. Year-to-date, pro forma adjusted EBITDA totaled BRL 3.6 billion. Net income in 3Q '18 reached BRL 44 million and besides the effects that impacted the operational results or the operating results, Cosan's financial expenses were negatively impacted by Brazilian real depreciation against the U.S. dollar, specifically on the unhedged portion of the perpetual bond. It's worth mentioning that this effect does not impact the cash generation in the period and the year-to-date net income totaled BRL 324 million. Now let's move to Slide 9, where I will highlight the cash flow in the quarter.

Lower operating cash flow reflects the impacts we already mentioned at Raízen Energia in line with our strategy of building (inaudible) inventories. In addition to that, it should be noted that at Raízen Combustíveis we had an impact of approximately BRL 100 million referring to the diesel subsidy program, which was approved by the federal government after the trucker's driver's strike.

Out of that -- out of the total to be received, only 10% was paid and the remaining part is to be disbursed by ANP in the coming weeks since all the necessary information and documents have already been sent and processed by the agency. The effects of the operating cash flow at Raízen were partially offset by the improvement in Comgás. In cash flow from investments, there was a higher expenditure of at Comgás and please note that here, the comparison base impacted by the acquisition of Tonon mills by Raízen Energia in 3Q '17.

In cash flow from financing, the highlight was the funding operations at Raízen to pay the BRL 370 million related to the acquisition of Shell's assets in Argentina. The settlement of this acquisition was held only on October 1, not impacting cash flow this quarter. Pro forma growth in debt was up 8% in 3Q '18 to BRL 16.9 billion as the result of farming operation at Raízen. The average cost of investments on a pro forma basis, including Raízen, was at 109% of CDI. Cash balance remains strong but increase in gross debt led the leverage from 1.8x net debt-to-EBITDA to 2x pro forma net debt-to-EBITDA normalized by Comgás current account effect.

So let's move to the last slide and to conclude today's presentation. We are following up again with our guidance for the year without changing the consolidated figures. Comgás adjusted the normalized EBITDA range to between BRL 1.900 billion to BRL 1.950 billion due to higher volumes sold so far in the year in efforts to control expense. In Raizen Energia, we are maintaining the initial EBITDA projections, but we had to adjust the sugar volume produced in line with the reduction in sugarcane crushing and the higher ethanol mix. In cogeneration, we are now showing volumes produced and no longer the volumes sold, whether the volumes are of WX or W Shields our new trading company, is now consolidated in the results. At Raízen Combustíveis we decided to adjust EBITDA guidance to share with you our best estimate. This has been a difficult and challenging year. We had a major strike, pre-election uncertainties and lower economic recovery. We have seen a gradual improvement in results during the second half of the year after the strike but there are still challenges. The month's behavior in Otto-cycle with the diesel and gasoline pricings, not to mention issues related to the diesel subsidy program. Therefore, we decided to narrow the range, keeping the low end of the original projection, which is BRL 2.850 billion at the midpoint of the new estimate, as this remains our goal. And note that we are not adjusting the negative effects of the trucker's strike. Otherwise, we would be on track with the previous range. As a reminder, the projections of Raízen Combustíveis did not include Shell's operation in Argentina. Well this concludes my remarks. Thank you all. And let's move now to the Q&A session.

(Operator Instructions) That does conclude the question-and-answer session for investors and analysts. I'd like to invite Mr. Casale to proceed with his closing statement.

We don't have any questions, however, I came more than available here to take any questions from investors. Thank you very much.

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