Cosan SA (CSAN) 2018 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Cosan S.A. Fourth Quarter and Year of 2018 Results Conference Call. Today, with us, we have Mr. Phillipe Casale, Investor Relations Executive Manager; and Mr. João Arthur 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. The 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 S.A.'s Fourth Quarter and 2018 Earnings Conference Call. This conference call will be a bit different. As we have already announced into the market that there are a few operations underway in the capital markets involving the group. Cosan announced the voluntary tender offer for the acquisition of Comgás preferred shares and Raízen is in the process of issuing agribusiness receivable certificates. For this reason, we are suspending the disclosure of guidance for now. Presentation and the Q&A session will be strictly about the fourth quarter and 2018 results, and we will not be able to talk about expectations on future results.

Once these operations are concluded, we will resume guidance disclosure.

Now let's move to Slide 4 to discuss results starting with Raízen downstream operation recently acquired in Argentina. This is the first quarter that we've released the results of refining and distribution operations in Argentina. This acquisition was concluded on October 1, 2018, which means we will be talking about the full quarter. Before we start, I would like to give 2 disclaimers. First, downstream operation's functional currency in Argentina is the U.S. dollar, so we will report the results in this currency. Second, we will not disclose comparative periods. Prior to the acquisition, the Shell's operation in the upstream and downstream were consolidated, and we don't have this required separation for comparison purpose.

Let's now disclose the figures. 2018 was quite a difficult year for Argentina. Severe economic distress resulted in the depreciation of Argentinian peso, inflation and high interest rates. In the fourth quarter of 2018, the economic scenario improved from previous quarters, but a sharp drop in oil prices in the period directly impacted Raízen's results. Total volume processed by Raízen refinery was 75.5 barrels a day. The utilization factor in the refinery was 75% this quarter, impacted by a scheduled maintenance in one of its plants. The normalized level of refining utilization would be around 85%. It's worth mentioning that the operations have already been reestablished after the downtime.

Moving to the volumes sold. Diesel and gasoline, dropped 10% compared to 4Q '17 due to the lower economic activity, cutting back the demand in the period. Volume of aviation fuel grew 22% due to the increasing customer base and greater market share. The quarterly EBITDA was $22 million, adversely affected by oil price drop as well as a downtime in the refinery's production plants in December, which resulted in a one-time higher origination of fuel volumes supplied to service stations. Capital expenditures in the quarter totaled $36 million, of which nearly 90% relates to refinery operations and maintenance.

Let's now move to the next slide to discuss Raízen Combustíveis operations in Brazil. 2018 was a challenging year for the fuel distribution industry in Brazil as well. Besides the high price volatility, FX rate and oil price fluctuation, the truckers' strike and subsequent effects added up to the current slowdown and weaker demand for fuels. The demand for fuels is gradually recovering since the truckers' strike in May. Total sales volume grew by 4% in the quarter and 2% in the year, the highlights being diesel and jet fuel. In 2018, diesel sales reflected greater demand for agribusiness and B2B clients. The jet fuel followed the upturn trend of this segment. In the Otto cycle measured by gasoline equivalent, sales were down by 5% and 2%, respectively, in 2018 and in the quarter, affected by lower demand in the country. Ethanol parity remained below 70% in a few regions, boosting a higher consumption of the biofuel versus gasoline.

Now referring to EBITDA. The sharp drop in international oil prices at the end of 2018 impacted the average inventory in the quarter and required additional efforts and an [assertive] supply and commercialization strategy from Raízen. As a result, adjusted EBITDA in the quarter grew 1% to BRL 817 million, but it went down 6% to BRL 2.8 billion in 2018, in line with the guidance announced. I'd just like to remind that we reduced the guidance in November of 2018 since the volatility of the commodity price would bring an additional challenge for us to offset the truckers' strike negative impact in the results.

Now CapEx. We ended 2018 with 6,500 Shell service stations, a net addition of 252 stations and a total investment of BRL 857 million in the year, in line with the projections. These investments involve maintenance, conversion of new station and contract renewals.

Now let's discuss Raízen Energia results on Slide 6. In the third quarter of 2018 and '19 crop year, traditionally, the end of the crushing season in Brazil Central South region, Raízen crushed 60 million tons in this crop year, down 2% from the previous year. According to UNICA figures, crushing decreased 4% in the Central South region in Brazil. Drier weather had a negative impact on agricultural yield, which reached 9.1 kilos of TRS per hectare in the accumulated crop at Raízen, and therefore, impacting the volume of cane crushed. Production mix was 53% for ethanol from 45% in the previous crop year, in line with our strategy of focusing on higher profitability products.

Let's now talk about sales volumes of each product starting with sugar. As you can see in the graph on the right side, sales volume dropped 46% from 4Q '17. We concluded a few [storage] investment in our plants, which gives us greater flexibility to optimize sugar commercialization strategy with higher profitability. Sugar inventory volume grew 8% when compared to 3Q '18, in line with the sales trend for this crop. Average sales price in Brazilian real came 20% lower from 4Q '17, following a sharp drop in international sugar prices.

Now ethanol, the sales were 31% higher this quarter, driven by higher demand for the product and in line with commercialization strategy for this crop with a higher concentration of volumes on the fourth quarter of 2018. Average sales price came 12% higher than the same period of the previous crop and slightly above the industry average due to the portion of the sales that were hedged and priced better than those seen in the domestic market.

On the electricity side, as mentioned in the previous quarter, cogeneration results are imparted by the WX operations, our electricity trading company. Just reminding that we now break down own products and resale trading volumes, like we do for sugar and ethanol since this operation brings a significant impact on the revenue, but its margin is substantially lower than the sale of electricity generated by high using. Thus, own products sold declined 16%, reflecting lower biogas availability related to reduced crushing. Average sales price also decreased, especially in the spot price.

Before discussing EBITDA, I'd like to highlight the unit cash costs, excluding the CONSECANA effect. In the quarter, unit cash cost increased by 14%, reflecting the higher diesel prices, reduced agricultural yield, lower dilution of fixed costs due to the lower crushing as well as inflation in the period. Adjusted EBITDA reached a BRL 835 million, 6% lower than the 4Q '17, mainly reflecting the lower sugar price and drop of sugar sales volume, in addition to the higher cost incurred in the quarter.

Once again, it is worth noting that the commercialization strategy defined for this crop will concentrate a higher sales volume in the last quarter of the crop year, which impacts Raízen Energia's results and cash flow. Regarding sugar hedge, we are fully hedged for sugar exports for the current crop at an average price of BRL 0.50 per pound. For the '19, '20 crop year, we reached nearly 50% to 55% of the total sugar to be exported with an average price of BRL 0.57 per pound, a 15% improvement from current crop price. Regarding sugar global scenario, we are still surrounded by uncertainties concerning the size of the next crop and depending on the climate and production mix. There are consulting firms talking about deficit in the global sugar balance, calling for better pricing environment. Lastly, Raízen Energia CapEx grew 16% (sic) [18%] to BRL 616 million in the fourth quarter of 2018, due to the higher planting and tilling renewal expense is in line with expectations for the crop.

Now let's move to Slide 7, talking about Comgás. And Comgás released its results on Tuesday, so we go straight to the highlights here. Natural gas volume, excluding thermal power, advanced 6% both in the quarter and in 2018 with growth in all segments. Higher sales reflects commercial efforts to increase volume in the current customer base, jointly with network expansion and saturation. This quarter, we recorded a nonrecurring positive effect of -- on the EBITDA of BRL 716 million, related to the conclusion of the legal disputes, resulting in a year-end normalized EBITDA of BRL 2.7 billion. Excluding these effects, normalized adjusted EBITDA totaled BRL 546 million in the 4Q '18, 12% higher than the same period last year, mainly due to the higher volumes sold.

In 2018, normalized EBITDA advanced 12% to BRL 1.9 billion, already excluding the same nonrecurring effect I already mentioned. Comgás accumulated regulatory current account, ending the quarter with a current balance of BRL 251 million in favor of Comgás due to the gas price movement in the period. Lastly, CapEx totaled BRL 148 million in the quarter and BRL 530 million in the year, in line with the CapEx plan of Comgás.

Let's move to Slide 8. And before discussing Moove's result, I would like to remind you that as announced to the market on December 21, 2018, Moove will receive a capital contribution of up to BRL 562 million from CVC Fund, corresponding to a 30% stake in the company. The entry of a strategic partner will contribute to expanding the company's lubricant business besides optimizing its capital structure. We also would like to remind you that we recently initiated lubricant distribution operations in France, Portugal, Argentina and United States, besides expanding our business in the U.K. The business model is similar to the model of the other countries, focused on the commercialization and distribution of lubricants and other products to different types of clients with marginal investment.

Now let's discuss Moove's results. The improvement of performance of industry lubricant sales in Brazil and in other countries boosted EBITDA growth, which reached BRL 61 million in the quarter and BRL 238 million in 2018, also in line with the guidance announced. The better result reflects the better product mix with more contribution from finished lubricants as well as synergies captured by the expansion of international operations.

Moving to the corporate segment on the right side of the slide, Cosan's Corporate G&A expenses declined 14% in 2018 as a result of the company's effort to cut costs. Other operating revenues and expenses came in positive at BRL 96 million in the quarter, impacted by a reversal of provisions and by a positive one-off effect deriving from the exclusion of ICMS, which is the state tax, from the calculation basis of PIS/COFINS, which is a federal tax from the past periods.

Moving to Slide 9, we present consolidated results of Cosan S.A. on a pro forma basis, considering 50% of Raízen's results. Cosan's pro forma adjusted EBITDA grew by 23% in the quarter but went down 2% in 2018, reaching BRL 5 billion, in line with the guidance. Adjusted EBITDA reduction reflects lower results of Raízen Combustíveis, mainly impacted by the trucker's strike in May; and in Raízen Energia, affected by lower production and average prices in the period. Cosan's adjusted net income totaled BRL 730 million in the fourth quarter, also benefited by the noncash effect of a tax variation of the unhedged portion of the perpetual bond. In 2018, adjusted net income totaled BRL 1.3 billion, 35% higher than 2017, benefited by an improved net income of Comgás and Moove.

Let's go to the next slide to discuss the main impacts on the cash flow. Starting with the operating cash flow, which increased in the quarter compared to 4Q '17, mainly due to the improved working capital dynamics at Raízen Combustíveis Brazil on the back of supply demand in the period and the renegotiation of agreements, which extended payment terms. This effect was offset by Raízen Energia's commercialization strategy with higher inventory volumes in the quarter. In 2018, operating cash generation advanced 9% to BRL 5.3 billion.

Cash flow from investments was affected by disbursement on the second installment of $370 million related to the acquisition of Shell's assets in Argentina. It's worth noting that upon the operation signing in April last year, Raízen paid $100 million to Shell, and there's still one last installment to be paid by December '19 in the approximate amount of $450 million. These amounts that I mentioned previously are equivalent to 100%, but we only consolidate 50% of Raízen's result, which is equivalent to our stake in the company. Moove recorded our disbursement of BRL 61 million, referring to investments to start its operations in the U.S.

In cash flow from financing activity, there is a mismatch between funding and debt amortization at Comgás and Raízen, with the nonrecurring effect on cash generation in the period. Thus, the company posted negative free cash flow through equity in the quarter of BRL 560 million, while in 2018, pro forma free cash flow to equity was almost double the figures from 2017, totaling BRL 1.4 billion. Cosan pro forma gross debt, including 50% of Raízen's results, came in line with the third quarter, with an average cost of 104% of CDI. Lastly, I would like to point out that our leverage, normalized by the current account effect of Comgás, ended the year at 2.1x net debt, considering the pro forma EBITDA.

Before concluding the presentation, I would like to remind you that due to the transactions in progress that I mentioned in the beginning of the call, the company decided to suspend the disclosure of the guidance, and we will also not be able to discuss expectations relating to plans, future events and trends affecting our activities. Once these operations are concluded, we will resume disclosing guidance. Last, but not the least, our Cosan Day of 2019 will take place on March 19 in São Paulo, and March 22 in New York. We'll disclose more details soon, but I'd like to take this opportunity to invite you all to save the date for our annual meeting. That concludes my presentation, and we can now start the Q&A session. Thank you.

(Operator Instructions) As we don't have questions, this concludes Cosan's audio conference for today. Thank you, and have a good afternoon.