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Cosan Limited (NYSE:CZZ)

Q2 2014 Earnings Conference Call

August 14, 2014 11:00 AM ET


Marcelo Eduardo Martins – Chief Financial Officer

Marcos Marinho Lutz – Chief Executive Officer


Paula Kovarsky – Itau BBA

Christian Audi – Santander Investment Securities Inc

Ravi Jain – HSBC Securities


Good afternoon, ladies and gentlemen. At this time, we would like to welcome everyone to Cosan's Second Quarter of 2014 Results Conference Call. Today with us we have Mr. Marcos Lutz, 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. Should any participant need assistance during this call, please press star zero to reach the operator. The audio and slideshow of this presentation are available through live webcast at The slides can also be downloaded from the webcast platform.

Before 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 will turn the conference over to Mr. Martins, you may begin your conference.

Marcelo Eduardo Martins

Good morning everyone. I like to start our earnings call today with the consolidated pro-forma figure for Cosan S.A. We saw a jump of 9% in net revenues in this quarter in relation to the second quarter of 2013 was the revenues of R$9.6 billion in this quarter. In terms of EBITDA, we saw an increase of 6% in EBITDA in comparison with the second quarter of 2013 with the margin of 9.2% compared to 9.4% last year.

Net income, we have a net income of R$104 million in this quarter in comparison for the loss of R$2 million the second quarter of last year. I think it’s worth mentioning that in the equivalent quarter of 2013; we had a big impact driving from the FX variance, which basically was the main issue for the net loss in that quarter. We didn’t have that same effect this year and in addition to that we had an increase in the equity result of Raízen of R$197 million during this quarter.

While moving to the business – different businesses. I like to start with Raízen fuels where we had a jump in the volumes out of 9% basically in every single business line. So we’re coming from 5.6 billion liters of fuel sold last year, 6.1 billion liters in this quarter. In terms of net revenues we saw an improvement of 16% resulting R$13.7 billion in comparison with the R$11.8 in the equivalent quarter of 2013.

The EBITDA margin saw a reduction of 0.4% from 3.5% to 3.1% but we had a jump of 3% in EBITDA compared to R$470 million in the last quarter I am sorry in quarter in the equivalent quarter of last year for R$128 million in this quarter. We decided to breakdown the difference in the EBITDA for the first quarter of 2014 and the second quarter of 2014 I would like to explain what the biggest impacts were and where they come from I’ll also briefly talk about what happened with the same quarter last year.

This is a quarter when we have a lot of non-recurring impacts all across the board in the company and all across the businesses. But in a case of the fuels business as a function of an advertising campaign we have on Open TV again in Brazil we had invested R$20 million during the World Cup and this R$20 million is reflected in the EBITDA of the company of Raízen Combustíveis in this quarter.

In addition to that the biggest impact basically comes from negative barriers in the ethanol prize, we sold in the market or to the market in comparison with the acquisition cost of that ethanol that we normally basically buy from Raizen Energia. We have that impact was negative in this quarter as of consequence of the price reduction we saw in the ethanol price in the market.

So when we compare the same number with the quarter of last year we have a different sales over R$13 million which basically means that we had a negative variance in the second quarter of 2013 in comparison with the first quarter of 2013 and we had and even more negative variance during this quarter. So when we look at the second quarter of the fiscal year – in comparison with the first quarter we normally see a reduction as a function of this big variance in the inventory like – basically its not actually that were marking to market the inventory basically the difference between the acquisition cost and the sale price of ethanol in the market. So that was basically the main impact we saw in this quarter and for this reason we don’t foresee any additional substantial impact in the following quarters as we think that this impact could be even recovered in the third or the fourth quarter of this fiscal year.

Overall, we are seeing the fundamentals of the business continuing to be extremely strong as we’ve been seeing it in the last quarters and we forecast – we decided to keep the same guidance for the EBITDA as we forecast recovery in the margin and in the overall EBITDA for this business for the rest of the fiscal year 2014.

Talking a little bit now about Raízen Energia, sorry just one last point the $7 million that we see here in the chart is basically a reduction in real estate sales in this quarter in comparison with the first quarter. So we saw $7 million of reduction in terms of real estate property sales and therefore the $7 million impact. And that $7 million is basically net of other gains or positive variations we had in the second quarter for the fuel’s business in high.

In terms of Raízen Energia, we had 13% jump or increase in the sugarcane crushed coming from 18.5 million to 21 million tons in this quarter and 14% increase in sugar production that reached 1.35 million tons in this second quarter. Ethanol production also jumps 19% reaching 705 million liters and energy sold also jumped roughly 19% going to 684,000 megawatt hour at an average price of R$256 which is substantially higher than the R$117 average price we sold energy in the second quarter of 2013.

TSR also include 2% as a function of the dryer weather we are having in the Central South region of Brazil were at the bulk of sugarcane production basically is concentrated. In terms of the net revenues we saw an improvement of 14% reaching R$1.7 billion roughly and the 16% jump in EBITDA from R$413 million to R$478 million in this quarter with an improvement in EBITDA margins from 27.9% to 28.4%.

The hedging operations were done and basically the balance we had at the end of the second quarter was of 2.37 million tons of sugar hedged at an average price of 18.23 per pound at an average Real to U.S. dollar exchange rate of 2.38. Now moving to Comgás, it was weaker quarter for Comgás in terms of volumes sold especially as a function of the reduction in economic activity in Brazil. We saw basically an overall reduction of 2% in the volume sold from 1.43 million to 1.4 million cubic liters in this quarter.

Net revenues include 1% from 1.6 to 1.16 and EBITDA jumped 34% and R$314 million to R$420 million. One of the biggest impact on the improvement of the EBITDA comes from a recovery of R$73 million of the regulatory account, which balance is now standing at R$223 million as of the last day of the second quarter 2014.

In terms of Rumo, we have a 13% increase in the volume loaded reaching 2.2 million tons with net revenues of R$191 million representing 11% reduction in comparison with the second quarter of 2013, and an EBITDA reduction of 36% reaching R$54 million in this quarter. We have lower volumes transported in the quarter we did not also implement price increases as a function of the increased in the cost of products sold as the function of the FX variations over the last couple of quarters, which had obviously negative impact on the acquisition cost for TSR, which is very relevant component of our cost equation at Cosan Lubrificantes.

In terms of the Radar, we have an improvement of 77% in the net revenues that reached R$34 million and a substantial jump in EBITDA to R$85 in this quarter. The biggest impact basically came from the appreciation of the land portfolio as we market-to-market every quarter and we also had an increasing in net revenues as a function of the highest sales of properties in this quarter.

Sorry, I think I made it a mistake, I just realized that when I was talking about Lubrificantes just recap a little bit talk about Rumo – suppose to explain as a little better than I actually did. We have at Rumo an increase of 13% in the volume loaded with a reduction of 11% in the EBITDA, which was basically a consequence of a reduction in the volume transported in the railroad season. And then also had a negative impact of 36% in the EBITDA of the company where the reduction in the EBITDA margin as well.

We have lower volumes transported as we decided basically to nominate a lower volume through transported by ALL at this point in time. Now going back to, of course, our lubricants I think it, I have already explained what happened with the business, even though we had an increase in the volume sold and an increase in the net revenues, we have a reduction in EBITDA, as a function of an increase in the cost of dialog remain raw material, which is base oil and also extraordinary expenses due to the world cup and marketing expenses related to that event.

Now back to Radar, as I mentioned before. So an improvement in net revenues and EBITDA as well, I’m talking a little bit about the net transportation of the company, we have included during the second quarter, the structuring of the preferred shares issuance at Cosan, what we did was basically considered as part of our consolidated debt our pro forma debt, which include 60% of the debt of raising, where we reach it net debt EBITDA ratio of 2.6 times, when we exclude the impact of the debt coming from, if we look it as that of the preferred equity, we would have ended the quarter with the net debt EBITDA ratio of 2.1 times.

In terms of the guidance, we decided to revise the guidance and reduce the projected volume of sugar crushed for this crop year from 61 million to 63 million tonnes and 58 million to 60 million tonnes. We have also reduced the volume of sugar sold from 4.4 million to 4.7 million to 4.2 million to 4.5 million and also the volume of ethanol sold from 2.3 billion to 2.6 billion liters to 2.2 billion liters. Energy sold, we’re expecting to sell pretty much the same volume that we basically had predicted and guided the market.

Therefore, we decided to update the guidance. We have not updated the EBITDA nor revise it, because we think that with further reduction in the cost and operational cost of the company should more than compensate the lower sugarcane crushed during this crop year. We will provide an updated guidance to the market in the next quarter, as we process – maybe should implement the spin of Cosan logistics or the logistic business and once we do it we will come up with the new guidance for the market considering the transport business.

So, we should actually expect a new guidance in the next quarter that as we explained previously should impact negatively the EBITDA of Rumo for instance and probably Cosan Lubrificantes under Cosan S.A. business as well.

In terms of subsequent events since our last earnings call for the previous quarter, we have on the 18 June, the application for the approval of this corporate restructuring at ANTT on the 21 of July, we have basically the filing for the approval of the corporate restructuring with M-tec and on the 21 July I saw we formalized a merger protocol with the Antitrust Commission in Brazil.

And on the 25 of July, we published the Concentration Act with Antitrust Commission as well. This all we made to basically that the Rumo ALL transaction or the merger of the two companies. Since then we have also approved the share buyback program for Cosan S.A., which was disclosed on the 8 of June. And on the 21st of July, we formalized the 2014 the October 2014 effective date for the spin off of the Cosan S.A. and the creation of technologies, I’m sorry the date here is not right, it was not on the 21st of July that was actually today the 14 of August.

Okay. I will like to wrap up the presentation just saying that we recognized it has been weaker than expected quarter for some of our businesses. I think that we had a big impact from non-recurring events, which were mainly the World Cup, which took place in the second quarter and also the formation or the basically the merger of ALL RUMO the submission of ALL the approvals for the merger of RUMO ALL.

We would like reiterate the fact that those fundamentals for all businesses continue to be extremely strong and we are very confident that we see a recovery for the margins of most of this businesses maybe with the exception of this the Cosan Lubrificantes business, which as a function of lower reduced economic activity should be impacted. I think it’s also fair to say that we’re seeing a recovery in the EBITDA margin for this business in the third quarter, which basically indicates that we’re basically having a better quarter than we have the second quarter.

In terms of Comgás we’re also seeing reduction in the volume sold, which is also a consequence of the reduced economic activity in Brazil. That Comgás is a very resilient business and they have manage to compensate a weaker market demand with sustainable results, but and again we’re not going to be revising the guidance for Comgás we expect to say that, we should expect some volume impact moving forward and we’re not seeing a recovery in economic activity in Brazil at this point in time.

With that I like to turn it back to you. And Marcos and I are here to answer your question. 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 Paula Kovarsky with Itau BBA.

Paula Kovarsky – Itau BBA

Hi, I have two follow-up questions from the previous call. The first one is can you possibly share with us the impact of trading activities for Raizen Energia in this quarter? And the other question is understand that you guys do not intend to provide any guidance revision for Raizen Energia in terms of CapEx for now, but is there room for further reductions in the CapEx for that business unit this year and going forward?

Marcos Marinho Lutz

I think was the trading impact in the Raizen Energia was R$20 million roughly during this quarter. And then in terms of the CapEx, we’re obviously trying to reduce even further the CapEx for the company. As you mentioned to the market of few times, which is one of our biggest objectives moving forward. And we do what is possible, we know have anything to anticipate right now so it will continue to be the focus of the management of the company. In addition to that I think it’s fair to say that we’re seeing big improvement in terms of cost reduction, which was one of the main factors responsible for compensating a reduction in the sugarcane approximately the (indiscernible) of lower sugar and ethanol production as well.

Paula Kovarsky – Itau BBA

Thank you.


Our next question comes from Christian Audi with Santander.

Christian Audi – Santander Investment Securities Inc

Thanks Marcos, Marcelo. I had two questions. The first one, Marcelo, touch on the last point you made during the presentation. I just wanted to make sure I understood it correctly. As you look at fuel distribution, you expect, for example, EBITDA per cubic meter to regain a higher level than what we saw this second quarter. And are you already seeing that type of improvement through the month of July? And then the second question was a broader one. Marcos, maybe if you could just do a general overview. When you look at your main businesses and we are faced with the second half of the year where economic activity will remain challenging. Where do you have higher conviction among your businesses that the fundamentals will really remain in place despite these weaker economic variables? And where do you think, when you have to be realistic, consider there are risks that fundamentals may be more negatively impacted as the economy slows down?

Marcos Marinho Lutz

Christian, first we have not seen the gross margins of the fuel business shrink this last quarter. So, the EBITDA margin actually had a negative impact provided by those onetime events we mentioned. So, yes, we not only delivered, we already see and we already saw the maintenance of our margins and we expect a better – a lot better EBITDA margins than last quarter. In this quarter we are do now. So, this is quite straight forward and then actually starting to answer your second question.

We see this business is a very resilient one. Despite having with a both adjacent and B2B diesel exposed to GDP, the bulk of the business I would say we’ll be let’s say Brazilians and will actually be on the same levels and with some growth, pretty much in scenario we foresee today. So this is a very resilient business. Comgas again is resilient too; we might see a lower volume on the industrial side that’s correct. We don’t see though a big impact on the negative side happening on the full year for Comgas.

On Cosan moves is where I see again a better second half than the first half but this would not compensate the let’s say whole that the second quarter putting our budget for the Cosan lubs if I would put that in that – let’s say internal rate it’s probably the one business in the Cosan portfolio, that will won’t need the budget on the EBITDA side. We might have good surprises on the end of the year; the second half is normally the strongest half of the year. But again we actually missed big number on this last half EBITDA let say compensate for that on the second half. But the second half I would say will be a good half of the year, we will see that’s a good numbers for this business as well, let’s say that the World Cup would not be present.

Again – and then Rumo ALL again this is the trending merger subject to approval on the CADE so it is tough to give clear guidance as for you given that we don’t know exactly the timing of this approval and exactly when we will deploy and start doing what we believe should be done. So it’s tough to give you that guidance, but this business has a whole it is quite strong because both actually are driven by demand and the demand is there. I mean there is product to whole is a very resilient on the long run, this is something that Brazil will need now and full good. So this infrastructure will be actually serving in any scenario those main markets and again is more a homework of cost reduction and the volume capacity improvement and anything else. Therefore is not to be very impacted by the economic scenarios.

Christian Audi – Santander Investment Securities Inc

And what's the base case you're using for this approval timing, Marcelo, for Rumo? Is it a third quarter event, fourth quarter event? For us to be able to provide more guidance?

Marcos Marinho Lutz

With the lack of our best estimates, we have our base case at the end of the year, okay. But again educated guess, but again, not that well educated, because those stuff because its happen we’re starting the process. And this will be lets say a process throughout election times I mean actually the timing for this you don’t anticipate problems but for us a big question mark is around timing.

Christian Audi – Santander Investment Securities Inc

Okay thank you.


Our next question comes from Ravi Jain of HSBC.

Ravi Jain – HSBC Securities

Hi, good morning. I had two quick questions. On the Rumo front, should we continue to expect the lower transported volumes for the balance of the year? And looking more into 2015 as to should this be normalized once the duplication between Campinas and the Port of Santos is completed? And my second question is on Comgas. When do you expect to finalize a new rack with the regulator? And do you expect the commercial and residential segments to pick up growth in the next 6 to 12 months, given that they have really strong potential?

Marcos Marinho Lutz

Ravi, first a slight correction I must tell is a point around volume in fact we have transported all the volume that we will plan what happened was really on the revenue side where we unilaterally decided not to charge fees and things for now given that there is a – let’s say an armistice on the judicial issue against ALL, so that was the main thing and I would say you expect this for the remaining of the year. On the timings as I mentioned I mean on the lets say on the highly has 11 months to approve a deal okay so the worthy scenario for us will be 11 months we don’t see this happening from our brief discussion initial discussion with them we understand they are very focusing in judging this weekly I think quickly should mean three, four months. So the timing would be but again its tough for me to I mean we should not assume this in your decision because again it is just a guess even that the law will say that we have up to 11 months. We have many cases where CADE made this type of call in a month, but again given the size of this impact in Brazilian economy this might take a little longer. So that’s the – and what was your – about capacity I see probably in the next six months that application by the Brazilian run is paying for from the beginning the contract. This probably will be concluded so completed other way presented will be duplicated pretty much in six months from now, which will debottleneck a big chunk of capacity there. What is your other question?

Ravi Jain – HSBC Securities

Yes, and once that is duplicated, do you expect that the margins and the pricing of the transportation business will get back a little more normalized? Or do you still expect to see these challenges?

Marcos Marinho Lutz

No, again I think this will probably get normalized the thing is – there is a very large effort and actually making those let’s those systems the real system all over the place to have the capacity and let’s say the reliability needed for the market. So if you ask me, let’s say short-term timing will be tough for us to answer, because we are still not with the information in detail that we will have after the CADE approval. After the CADE approval is when we actually can really start putting together, let’s say the management and let’s say, I’d say that the programming and let’s say the management structure that we believe is right will be done after that.

So at this point we have very limited access and no influence in the company’s daily operation. So timing wise in four months if CADE approved as is when we will start to answer the questions as scheduled or how many months will it take to get to this level of capacity to this level of profitability and probably six months from that approval is when we will be able to come back to you and say you know what this is the plan, this is let’s say the expected returns on the plan and this is actually what we will do and this is the timing that those things will happen. So at this point we know the direction a very clear direction and the potential of other things. But it is tough to define the timing at this point.

Ravi Jain – HSBC Securities

Sure, thank you so much. And on the Comgas just quickly as to when do you expect to finalize the new rack with the regulator?

Marcos Marinho Lutz

Beginning of next year

Ravi Jain – HSBC Securities

Okay. Thank you that’s helpful.


Our next question comes from (indiscernible).

Unidentified Analyst

Thank you. Just going back to the issue of the nature of your business, as you say, there are a number of parts of your business which are fairly predictable and steady businesses. Yet overall as a Company, I find it very frustrating quarter by quarter the surprises that happen each quarter, the one-offs. The sort of known-unknowns. Do you think there's a time out there when the overall performance of the group becomes rather more steady and predictable? Or is it just the nature of the businesses that you're in that we have to live with these events quarter by quarter?

Marcos Marinho Lutz

Mark, we believe we understand your point and obviously, if you look at this company since 2008, this was basically when we started this transformational movement to diversify our portfolio away from sugar and ethanol. And since then we’ve been making essential acquisition non-stop, I mean, if you look at Comgás three years ago. And then last year we had the consolidation of Comgás then we have the permission of Rumo and then we announced the merger with ALL and previously we had Raizen and then before Raizen we had the acquisition of ExxonMobil of assets.

So, first, I think that there is last six years have been extremely active for us and it’s very hard to predict a business it gets involving like that. I think that we have reached the point right now. I think that the spin-off, the logistics business is going to help us tremendously because we’re basically separating a business that is much more volatile and we’re going to a transformational profit as well, from the business that is more stable. And there has a more predictable tax generation. Sugar and ethanol is commodity, I mean, it is a business I will keep with its volatility, because of the nature of that product results.

If you look at Cosan, the Raizen Combustiveis, I mean, we’ve mainly have had in the past some volatility within the quarters, but the result of the year was pretty much inline with what we indicated to the market, maybe it’s harder for us to predict what’s going to happen within the quarters. And again even within the quarters, when you look at what happen with the fuels business, you’ll see that there is a pattern. I mean, the first quarter is better than second, the third is better than the second and then the fourth is the best quarter of the year, which is normally the way it works, I mean historically. I know it can’t be frustrating sometimes we’re trying to disclose as much as information as possible.

So that you understand what are the factors that impact the business. I think that were the creation of the Cosan logistics with much easier to explain the business is – in the business is because they are completely different businesses impacted by completely different factors. And hopefully they will improve the way the market will read for the business, it’s going to have on immediate reflection in the stock price that’s what we expect. But, I understand what you’re saying and now we’re trying to do all we can to minimize this impact.

Unidentified Analyst

And the thinking behind the spinning off of the Logistics business. I mean it seems only a short while ago you were seeking to do deals in this area and build it up as a core business. So what has changed there?

Marcos Marinho Lutz

Well, Rumo is a company was started (indiscernible) right, as you know in 2009, 2010. It I think 2012 we’ve been trying to acquire a relevant stake in ALL. We didn’t succeed after some ups and downs in our negotiations up until six months ago. When you basically managed you a lift recent agreement with some of the shareholders of the company. And now, we will waiting for the approval of the antitrust, I mean what happens is that and we started Rumo as I said with two terminals in an investment of R$100 million, and stay we have a business there is worth for R$1 billion. And now we’re trying to improve this business even further through this merger with the ALL. And again this is probably the biggest transformation of portfolio, but we haven’t concluded that yet, which we something we expect to happen until the end of this year.

Unidentified Analyst

But is it a recognition that the nature of this business is very capital intensive and very -- it takes a long, long time. Is that part of the issue here?

Marcos Marinho Lutz

Yes, it is. It’s a capital incentive business, because as you know this integration was Rumo and our willingness to expand the capacity in the railroad, we’re going to invest with some special amount of money. We’re doing that these are the assumption that money is going to come in this part from the NDS and will also be able to get an extension in the session agreement from the regulators, but it is certainly in nature a very different business from the energy business, because I mean, the cash flow generation in the business project sometime because of the investments we need to make throughout in the energy business, we have existing cash flow generation, which will keep improving overtime.

Unidentified Analyst

Okay, thanks.


Thank you. That concludes the question-and-answer session for investors and analysts. I would like to turn the floor over to Mr. Marcos to proceed with his closing segment.

Marcos Marinho Lutz

Well, I like to thank you again for participating in our call, we are going to keep you updated with the further - move and especially related to Rumo ALL transaction and we hope to talk to you very soon. Thank you.


That does conclude Cosan Limited second quarter results. Thank you very much for your participation.

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