Cosan's CEO Discusses F3Q13 Results - Earnings Call Transcript

| About: Cosan Limited (CZZ)

Cosan Limited (NYSE:CZZ)

F3Q13 Earnings Call

February 7, 2013 9:30 am ET


Marcos Marinho Lutz – Chief Executive Officer

Marcelo Eduardo Martins – Chief Financial and Investor Relations Officer


Juan Tavarez – Citi

Pedro Herrera – HSBC

Luciano Coster – Credit Suisse


Good morning, ladies and gentlemen. At this time, we would like to welcome everyone to Cosan’s Third Quarter of the Fiscal Year of 2013 Results Conference Call.

Today with us, we have Mr. Marcos Lutz, Cosan’s CEO; Mr. Marcelo Martins, CFO and Investor Relations Officer; and Mr. Guilherme Machado, Investor Relations Manager.

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. After Cosan’s remarks, there will be a question-and-answer session for industry analysts. At that time, further instructions will be given.

(Operator Instructions) The audio and slide show of this presentation are available through a live webcast at 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. Martins. You may begin your conference.

Marcelo Eduardo Martins

Thanks. Well, thanks everyone for attending our quarterly earnings call. This quarter will be the first quarter when we’ll consolidate or when we have actually consolidated Comgás. We concluded the acquisition of Comgás in the middle of the quarter, so we have only consolidated two months of Comgás results in Cosan’s figures.

We had in addition to the consolidation of Comgás, a couple of other non-recurring events and the first one is actually the results of the sale of Cosan Alimentos. We have, as you know well, sold Cosan Alimentos to Camil, and was during this quarter that we actually saw in our results the impact of the gain from the sale of the stake and company to Camil.

And we had also during this quarter, a non-recurring result coming from the sale of our participation in certain distribution depots and terminals as part of an agreement we have with other two players in the industry.

In the long run, this will be a recurring event, because it happens from time-to-time as a way to adjust the participation of each player in the pool of depots and terminals. But for this specific quarter, it is considered to be non-recurring event.

Starting with the figures for Cosan S.A., on a consolidated basis, we had during this quarter relative to the third quarter of the fiscal year of 2012, an increase in net revenues of 33.1% resulting in R$8.4 billion of net revenues during this third quarter of 2013.

We had also an increase of 265% in our net income jumping from R$94 million to R$342 million, and also an improvement in the EBITDA margin from 7.8% to 14.2% with an increase of 141% in the actual EBITDA of the company that jumps from R$495 million to R$1,194 million during this specific quarter.

Now moving to the different business line, I’d like to start with Raízen Combustíveis. This was another very good quarter for Raízen Combustíveis in terms of the performance of the business, which was mainly driven by an increase in the volume of fuel sold, and better pricing for, all across the board in the company’s portfolio. So, we saw an increase of 8% in the volumes sold from 5.3 billion to 5.7 billion liters in the third quarter of 2013, and an increase in net revenues of 13% jumping from R$10 billion to R$11.4 billion during this quarter.

The EBITDA also improved pretty substantially from R$348 million to R$493 million in this quarter representing an increase of 42%. The EBITDA margin also improved from 3.4% to 4.3%.

When we deduct from the EBITDA, the non-recurring sale of our stake in some of the pools, we will end up with an EBITDA of R$449 million during this quarter. So that actually resulted in the new EBITDA multiple per cubic meter of R$78.3 compared to R$86 when we consider 100% of the EBITDA in the quarter.

Now moving to Raízen Energia, it was also a very good quarter in terms of operational performance for this business. We saw a dramatic increase in the crushing during this quarter compared to last year, represented by 17.8 million tons compared to 8.2 million tons in the respective quarter of 2012.

The sugar production also increased by 107% from 656,000 to 1.36 million tons and the ethanol production increased 93% from 322 billion liters to 628 billion liters in the third quarter.

The TSR has reduced or decreased in this quarter as we had anticipated in previous quarters, moving from 143.6 kilos of sugar per ton to 125.2 during this quarter. The volumes sold of electricity in the cogeneration business increased 336% from 350,000 to 1.5 million megawatt hours during this quarter. That represents actually an increase in the average price from R$152 to R$211 per megawatt hour.

We have, in this quarter, as a function of additional energy or electricity being produced out of our mills, increased the volume of energy sold in a spot markets. And as you know, compared to the same quarter of last year, the price is substantially higher and that’s one of the reasons why we had such an improvement, and basically an increase in the average price of energy sold during the quarter.

When we look at the net revenues in this quarter, we saw an improvement of 49% reaching R$2.6 billion, and an improvement in EBITDA margins from 28.7% to 32% during this quarter represented by an EBITDA of R$834 million compared to an EBITDA of R$502 million in the third quarter of 2012.

In terms of the hedging of sugar, at that time or at the closing of the quarter, we had an outstanding fixed amount for the year of 2013 and 2014 of 750,000 tons at an average price of 21.9 cents per pound, and for the current crop, we had fixed 2.7 million tons at an average price of 22.57 cents per pound.

In terms of the U.S. dollar hedging, we had fixed for this fiscal year $1.4 billion at an average of R$1.96 per U.S. dollar compared to – for the next crop a volume of $381 million at an average exchange rate of R$2.16.

Now moving to Comgás, we have recently or as recently as yesterday released our earnings, our quarterly and our yearly earnings for Comgás, and now we’ll just recap the highlights focusing on the year end results.

As you know, Comgás’ fiscal year coincides with the calendar year, which basically means that we have, actually on December 31, closed our annual earnings for the company.

We saw an improvement in terms of the volumes sold of almost 10%, roughly 9%, to 5.2 million cubic meters. We had gross revenues of R$6.5 billion in the year, and an EBITDA of R$743 million represent an increase of 42% compared to 2011 with an EBITDA margin of 14.1% in the year of 2012. In terms of connected meters, we saw an increase of 7.6% reaching 900,000 units connected in the year of 2012.

Now back to the other businesses of Cosan, the ones that are 100% comparable to business quarters. We had in the third quarter of 2013, a good operational performance from Rumo, which basically loaded a volume of 2.3 million tons in this quarter compared to 1.6 million tons in the same quarter of 2012.

In terms of net revenues we saw a big jump of 55% as the function of not only higher volumes, but better prices due to a better mix of roots. And the net revenue totalized R$222 million during this quarter, resulting in an EBITDA of R$99 million with an EBITDA margin of 44.6% for the quarter.

Radar which is a business we have recently started to consolidate as well, saw a reduction in its net revenues of 13.2% from R$18 million to R$15.6 million, and a reduction in EBITDA from R$249 million to R$97 million. This reduction was actually caused by a revaluation of the land portfolio of the company that took place in the third quarter of 2012, which was non-recurring as that was the first time that we actually revalued the whole portfolio of land of Radar.

And what we’re seeing in this specific quarter is just the revaluation that takes place every quarter as a function of the index and the variation that represents the variance of the value of land in Brazil. Therefore, those numbers are not immediately comparable.

Moving forward now, in terms of the other business line, what we’re seeing in the other business line is a combination of the lubricant and specialties business that had an improvement as a result of the consolidation of Comma and the better performance in the new markets that we have recently introduced as a function of the acquisition of Bolivia, Uruguay and Paraguay last year as well.

So we saw an increase in net revenues because of that specific initial consolidation of Comma and improvement in the other markets. That net revenue has resulted in R$378 million during the quarter with an EBITDA of R$178 million.

The bulk of this EBITDA is actually coming from the gain that were incurred through the sale of Cosan Alimentos’ stake to Camil, and that is also considered as a non-recurring item as I have explained in the beginning of my presentation.

Now, moving to the net debt position, we had, in this quarter, an increase in our net debt position as a function of the consolidation of Comgás, and therefore, it’s a gross debt of R$2.5 billion. And the consolidation – I’m sorry, and the incurrence in the syndicated loan through local debentures that we’ve actually raised with the purpose of buying that stake in Comgás, which was in the amount of R$3.3 billion. With that, Cosan’s consolidated net debt position was of R$8.8 billion.

And when we look at the last 12 months EBITDA, as we have to consider the last 12 months EBITDA of Comgás as far as the calculation for the net debt-to-EBITDA index, we come up with 2.4 times, which we consider to be a reasonable leverage ratio for the company even though we continue to pursue a net debt-to-EBITDA ratio of two times as we have discussed it with market and rating agency I saw before.

In terms of the guidance for this fiscal year that will end in the month of March of 2013, we have basically revised the EBITDA, the consolidated EBITDA for Cosan as a function of the – of a better performance in Cosan Energia and Cosan Combustíveis. And that new EBITDA range is now from R$2.3 billion to R$2.6 billion. In that number, we have not included the EBITDA resulting from the sale of Cosan Alimentos to Camil.

In terms of Raízen Energia, we have concluded our crop season, which basically means that we have harvested 100% of the cane that was available. That reached the 56.2 million tons of sugarcane crushed in the year of – in the crop year of 2013.

With that, we’re increasing our EBITDA guidance to R$2.4 billion to R$2.7 billion, as a function of a better performance in the fuel retail business. We have increased Raízen Combustíveis’ projected EBITDA to R$1.5 billion to R$1.7 billion.

In Rumo, we have maintained our previous guidance of R$250 million to R$280 million of EBITDA. For Radar, we’re also keeping the same guidance of R$120 million to R$140 million. And with that, we believe that we’ll manage to perform better than we have originally predicted at the beginning of 2013’s fiscal year.

With that, I would like to wrap up my presentation and turn it back to you, so that we can answer your questions. Thank you.

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session for investors and analysts. (Operator Instructions) Our first question comes from Mr. Juan Tavarez with Citi.

Juan Tavarez – Citi

Hi, good morning, everyone. Just a quick question on fuel distribution, specifically on the sales mix, clearly, it continues to drive really good margins there. Within your gasoline, how much would you attribute of that sale to – of V-Power, to just kind get a sense of also what your target would be of penetration of V-Power within your gasoline sales moving forward? And my second question is regarding your overall CapEx. What’s your kind of expectation now looking forward in terms of CapEx for fiscal 2014?

Marcelo Eduardo Martins

Juan, well, first, in terms of the gasoline mix, V-Power accounted for roughly 28%, so it is actually in the range of 25% to 30% as we have recently predicted. We have, as you know, concluded 100% of the rebranding or almost 100% of the rebranding process and we’re probably reaching a percentage of V-Power penetration that is likely higher than we have recently anticipated.

In terms of the CapEx, we’re sticking to the guidance that we have provided to the market. As I know that the number, the CapEx that we had in the third quarter was slightly lower than we have recently anticipated, but there was a certain delay in some recurring CapEx that were supposed to take place in that quarter, which should happen in the fourth quarter. And therefore, we’re keeping the R$2.1 billion to R$2.4 billion guidance that we have provided to the market recently.

Juan Tavarez – Citi

Okay. Thank you.


Excuse me. Our next question comes from Mr. Pedro Herrera with HSBC.

Pedro Herrera – HSBC

Hi, good morning, gentleman. A quick question also in your distribution operation, these are very impressive numbers you have reached. How sustainable is this? Can you get any higher, and if so, what would drive that?

Marcos Marinho Lutz

This is Marcos. Obviously, it is – it can actually get higher. There’s a lot of work to be done. But obviously, we are already in a very, let’s say, higher level compared to where we came from and obviously, to industry standards. There are many factors helping on that number. And I would say most of them or all of them are quite sustainable on the medium run and some are very sustainable on the long run.

So the one that we keep saying here as a very sustainable part of our strategy is the mix of premium fuel. So, just mentioned here the V-Power. We also have the recently launched Shell Evolux, which is the diesel offer for premium as well. We’ve been very successful as well. It’s still picking up, but it will bring, good margins for the medium run.

There is something that I would qualify as something very sustainable now for the medium run at least, which is the mix. I mean the margins are higher in the petroleum products versus the ethanol and having more gasoline versus ethanol on the metrics brings automatically a higher margin.

There is another dimension, which is, what we call the non-fuels. This has been also more focused from now on. We have to remember that the team was very focused in rebranding and bringing the whole offer to, let’s say, a level playing field and actually having all our stations in the same brand with the same way to operate, the same offer and all that stuff. This was the primary focus for the first two years.

I think now, let’s say, after this low hanging fruit, I mean, what we have to pursue now is really create more critical mass on what we call the non-fuels, which means having a larger result on convenient stores and then credit cards and all those things that we consider as something quite important through the long run health of our margins. But, I mean, summarizing, we believe this is a sustainable number. We still have upsize going forward. Obviously, we have threats, but I think we feel very, let’s say, well positioned to face those threats successfully.

Pedro Herrera – HSBC

Great. Thank you very much.


(Operator Instructions) Our next question comes from Mr. Luciano Coster with Credit Suisse.

Luciano Coster – Credit Suisse

Hi, good morning. Congratulations on the results, and thank you for the call. I have two questions. The first one is can you give a little more color on your expectations for ethanol demand in the domestic market, given the price increases recently at the pump in Brazil? And my second question is considering how you financed the Comgás acquisition, do you have any plans for financing in the market, whether it’d be U.S. dollar or in local currency? Thanks.

Marcelo Eduardo Martins

Well, on the last one, obviously, real-based financing would make sense given that Comgás is, let’s say, a very real-based operation in terms of P&L. And about the ethanol mix, I would say that at the end those changes will, at the end we'll change the price point of the ethanol, not necessarily we'll change the demand. The demand will be on the short-term driven by the production.

So obviously, we’ll have a larger production, which means that we will sell more ethanol. But when gasoline prices are little higher, this means that we can actually sell that production at a higher price. So this actually eases a little bit the stressed pricing that we’ve been having and been facing in the last two years on the ethanol side. The industry, the production industry of ethanol is being actually through bad results because of this compression in price, it will be easing up a little bit now.

What you have contracted is a 5% higher mix on the gasoline from the anhydrous ethanol. This for sure will show a higher demand on anhydrous prices, also commanding a little larger price on that product as well. But in this case, we will bring demand up and we will drive oil production or even imports to face that demand because this will be a contracted demand.

Luciano Coster – Credit Suisse

Thank you and congrats on the results again.


Thank you. That concludes the question-and-answer session for investors and analysts. I would like to invite Mr. Marcelo Martins to proceed with his closing statement. Please go ahead, sir.

Marcelo Eduardo Martins

Well, I just wanted to thank you again for participating in our call. And to say that, despite the non-recurring demands that we had during this quarter, we managed to deliver very solid results compared to other quarters, compared to the last quarter, compared to the same quarter of last year, which in our opinion is a function of our big focus in improving operational standards of our businesses including the sugar and ethanol business where we have made substantial improvements in terms of reducing operational costs.

So, what we believe is that the strategy of consolidating a business portfolio that will bring more stability and cash flow predictability in the future. We have achieved this big, I would say, mark probably by having a good quarter, which will lead us to have a good and a record year of 2013, hopefully.

With that, I’d like to end the call. Thanks again and we’ll talk to you guys very soon. Thanks.


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

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