Cosan Limited (NYSE:CZZ)
Q1 2016 Earnings Conference Call
May 13, 2016 10:00 AM ET
Phillipe Casale - Investor Relations Manager
Mario Silva - Chief Executive Officer
João Arthur Souza - Chief Financial Officer
Paula Kovarsky - IRO
Alexandre Falcao - HSBC
Good afternoon ladies and gentlemen. At this time we would like to welcome everyone to Cosan S.A.’s First Quarter of 2016 Results Conference Call. Today, with us, we have Mr. Mario Silva, CEO; Ms. Paula Kovarsky, 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 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 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 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 Ms. Paula. Ms. Paula, you may begin the call.
Good morning everyone. And welcome to Cosan S.A.’s first quarter 2016 teleconference. As announced on April 19, there were changes in the company’s management structure. Nelson Gomes who was CEO and IRO of Cosan S.A. stepped down to focus solely on his role as CEO and IRO of Comgas.
Mario Augusto da Silva joined the group as CEO of Cosan S.A. and the IRO role was taken over by me Paula Kovarsky in addition to my role as CZZ IRO. Besides me and Mario, João Arthur Souza, CFO; and Phillipe Casale, IR Manager of Cosan S.A are here with us for this conference call.
On slide number 3, we outlined our business units for reference and we can go straight to slide number 4, where we present the result of our Raízen Combustiveis, our fuel distribution joint venture retail.
Following the trend of previous quarters, our sales volume outgrew the market average. This growth reflects the maturation of the strategy implemented around three years ago, focused on the growth of the distribution network through the conversion of independent service stations mainly on brand.
Sales volume in the Otto-cycle increases by 1% compared to the first quarter of last year and this compares to the market contraction of 2% supported by the addition of 380 new patients to our network over the past 12 months.
Raízen business sales grew 4% in the period as we added B2B contracts and due to the anticipation of the sugarcane crop. This compares to decline of 6% of the market.
Adjusted EBITDA reached BRL590 million growing 7% versus the first quarter of 2015 and the first quarter of 2016 was positively affected by BRL35 million worth of one-off impact, BRL46 million of diesel and gasoline price hikes and the negative impact of BRL11 million from asset sizing.
In the first quarter of 2016, one-off totaled BRL11 million composed of a positive impact of BRL5 million from asset divestments and a negative impact of BRL16 million from expenses with internal restructuring.
This quarter, was also hit by the aviation segment due to lower sales volumes, lower oil prices and exchange variation as well as by seasonal marketing expenses of BRL20 million. Note that those two are not included in the adjustment.
Moving to slide number 5, let’s talk about the sugar and ethanol income generation business of Raízen Energia. Starting with the first quarter, which corresponds to the last quarter of the ‘15/’16 crop year. The highlights of the quarter, was successful anticipation of crushing, 2.8 million tons of sugarcane.
This was an important achievement as we managed to anticipate the crushing in 13 out of 23 operating mills concluding the inter-harvest maintenance in two months which is half of the usual time with no issues at the start-up of the operations in the mills.
The climate was also helpful for us. With the ability to anticipate the crushing is an example of the increased focused on efficiency and processing.
EBITDA adjusted by biological assets and hedge accounting effect grew 38% over the same quarter of last season to reach BRL1.2 billion. The main factors supporting the EBITDA grow were 4% increase in sugar sales volume, mainly supported by the larger harvest and early crushing at high prices the reason by the exchange rate, the anticipation alone represent BRL150 million, improved ethanol prices or externally smaller drop in prices.
This usually happens in March but slipped through to April more than offsetting lower sales volumes. Unlike last year, when sales were more concentrated in the last quarter of the crop year, this will be enhanced carryover strategy. Ethanol sales this year were more evenly distributed between third and fourth quarters of this season.
In cogeneration, increased availability of biomass in the quarter offset the lower average prices reflecting a reduction in spot energy prices in Brazil. At the end of the quarter, we had 2.1 million tons of sugar from the ‘16/’17 crop year ahead at BRL0.56 per pound and this is equivalent to volume of sugar to be exported and 669 million tons of sugar from the ‘17/’18 crop year hedged at BRL0.672 per pound.
Moving now to slide 6, where we provide a summary of Raízen’s ‘15/’16 crop year. We recently updated Raízen Energia guidance. The first hand we get to the market in the beginning of the crop year pointed to an EBITDA ranging between BRL2.6 billion and BRL2.8 billion. We reviewed the range to BRL3 billion to BRL3.3 billion in the middle of the crop year and fine-tuned the number to BRL3.2 billion to BRL3.4 billion more recently.
The guidance evolution followed essentially increase in sugar and ethanol prices throughout the crop year. In fact the sharp drop in ethanol prices in the beginning of the crop boosted demand in such a way that it ended up quickly reducing forecast for these crop inventories and increasing prices well above expectations in the second half of the season.
Sugar sales prices increased to the devaluation of the Brazilian Real. And then the successful anticipation of the crushing and the BRL150 million generated explains the gain over the last guidance review.
At the end of the ‘15/’16 crop season, adjusted EBITDA reached BRL3.5 billion, 25% above the result of the previous harvest mainly because of better sugar and ethanol prices in addition to the efficiency gains and cost control initiatives on top of the crushing anticipation.
It is important to remember that in line with Raízen’s hedging policies, the positive impact of the real devaluation that’s favored the EBITDA of sugar exports during the quarter and during the harvest had a part in the financial results.
Now talking more about our efficiency and cost control initiatives. We have been showing the evolution of cost regarding planting and treatment, the CZZ which is cutting, loading and transportation of the sugarcane and industrial cost. Now we translate this impact more clearly into results measured in three different ways.
The cash cost of production increased 8% excluding the increase in constant currency therefore lower than inflation in this year, despite the lower amount of pure essence sugarcane, longer ‘15/’16 crop season and crushing anticipation.
The CapEx was 24% lower compared to the ‘14/’15 crop and within the guidance reflecting lower investments in sugarcane to renew and the conclusion of expansion projects.
And the CAPEX which is essentially the sum of maintenance CapEx and OpEx had a reduction of about BRL26 million in nominal terms for almost BRL115 million if we look at the comparison in real terms.
Turning now to Comgas on slide 7, this is our natural gas distribution business in the State of Sao Paulo. The Comgas reported its results on May 10. The main highlight of this quarter was the growth of the residential volume. This segment was negatively affected by the hydro crisis in the state of Sao Paulo. Water shortage came to an end and most importantly the state withdrew the incentives to reduce consumption which led to a reduction in the per capital consumption of gas.
Showers represent some 60% of gas consumption in residential segment. The recovery in unit gas consumption coupled with the connection of 115,000 new clients over the last 12 months resulted in a 23% growth in sales compared to the first quarter of 2015. The commercial segment also grew 8% as we connected the 1,100 clients over the last 12 months.
The industrial sector instead continues to suffer on the decline of investor activity falling 12% compared to the first quarter of 2015. But we have some specific events that explain the greater contraction compared to GDP, the migration of textile industry to biomass, the decline of consumption in steel plants following the sharp drop in constructions in automakers’ activity.
Comgas continues to work on new customers, connections, and new applications for this segment but the macro scenario remains the main driver here. The normalized EBITDA rose 8% compared to the first quarter of 2015 on improved sales mix and tariff adjustments.
The IFRS figure doubled compared to the same period last year due to the sharp reduction in the cost of gas and consequently the recovery of BRL195 million of the regulatory current account contributed to higher cash generation.
Just to remember, the current account is a clearing account between Comgas and the regulator regarding the difference between the price paid for the gas and the price of gas embedded in the calculation of the tariff. The balance is adjusted by the grades and amortized annually through an adjustment in the tariff up or down depending on whether the balance is negative or positive for the company.
In other words, the gas is essentially a pass-through and this is why we report and focus our discussions on the company’s normalized EBITDA. And as mentioned, the drop in gas purchase price accelerated the amortization of the current account which is now positive that is in favor of the consumer. Comgas invested BRL94 million in the quarter of which 75% on network expansion, 268 kilometers and 22,000 new customers.
Let’s go to slide 8, starting with lubricants, which include our operations in Brazil, Paraguay, Uruguay and Bolivia besides England and now Spain. Volumes increased 8% compared to the first quarter of last year mainly finished lubricants in Brazil.
Speaking about Brazil, the market fell 9% between periods because lubricants has been gaining major accounts especially automakers which means that vehicles leads manufacturers with mobile lubricants and their recommendation to use the product later on. Today we have 48% market share in light vehicles, 39% market share for trucks and 89% for motorcycles.
EBITDA rose 10% compared to the first quarter of last year, reflecting the growth in sales volume, better product mix and international operation results translated into the Brazilian Real. About Otto [ph], EBITDA declined due to lack of property sales in the period and no change in market indexes used to derive the FMV, the fair market value of the portfolio, both for non-cash effects.
Speaking about the quarter, general and administrative expenses totaled BRL42 million in the quarter impacted by higher personnel and consulting expenses as well as inflation in the period. The line order expenses decreased last year’s figure was negatively affected by expenses related to the merger of Rumo-ALL.
Moving to slide 9, we represent Cosan S.A.’s consolidated results on a pro forma basis considering 50% stake in Raízen. The adjusted EBITDA grew 15% year-on-year and reached BRL1.2 billion in the first quarter of 2016 mainly on Raízen Energia’s positive results.
We reversed the BRL44 million, loss in the first quarter of last year to BRL249 million net income in the first quarter of 2016 as a result of Raízen Energia’s operational improvement and the recovery of the regulatory current account which offset the increasing financial expenses which grew due to the higher interest rates and the fair value loss non-cash impact of a good option of two Rumo shareholders entitled to right to convert their Rumo shares into season 3 shares in accordance with the material effect dated April 28, 2016.
The pro forma free cash flow for the asset was BRL609 million, again reflecting the operational performance from gas regulatory current account recovery, lower CapEx and de-leverage. The difference between the first quarter of 2015 free cash to the equity and this quarter’s figure reflects two main effects roughly 50-50.
Lower cash generation from Raízen Energia remember that last year the strategy of carrying ethanol inventories was more concentrated in the last quarter of the crop year, partially offset by the Comgas current account effect and higher amortization of principle need. The pro forma CapEx fell 12% to BRL1 billion, in-line with the plan.
We can move to slide number 10 we had significant reduction in leverage this year. Net debt to EBITDA fell from 2.5 times at the close of the fourth quarter of 2015 to 2.1 times at the end of the first quarter of 2016 due to a 14% increase in the last 12 months’ EBITDA and the 3% reduction in assets.
With the 4% decrease in gross debt due to the amortization of approximately BRL800 million worth of that using senior notes ‘17 and entities and lower cash debts. The average debt cost on a pro forma basis did not change remaining at 93% of the CDI.
We announced yesterday, BRL290 worth of dividend payment totaling BRL0.71 per share. The record date is May 15 and shares will trade x dividends from May 16. If we adjust for this payment, net debt to EBITDA would be 2.2 times. Our goal is to continue de-leveraging for the medium and long-term we believe two times is a comfortable level appropriate to the portfolio of assets that we have.
In the next two quarters however, we’ll probably see an increase in this ratio due to Raízen Energia’s working capital cycle seasonality decreasing towards the end of this year and beginning of next year when we finish the ‘16/’17 crop year.
Let’s go to slide 11, the last slide of our presentation to talk about guidance. There was no change to the guidance presented last quarter, yet Raízen’s numbers were preliminary at the time as planning and budgeting cycle follows the crop year.
Specifically on Raízen Energia, the guidance indicates the crushing of 60 million to 64 million tons of sugarcane and an EBITDA ranging between BRL3.3 billion and BRL3.6 billion implying limited upside compared to the BRL3.5 billion adjusted EBITDA of the ‘15/’16 crop year, despite increase in sugar prices.
A few points to consider here. As we said, the anticipation of the crushing generated on EBITDA of approximately BRL150 million, that increased the EBITDA of last year’s crop. In the ‘16/’17, crop we hedged sugar sales with an exchange rate of about BRL2.9 to $1 and the effective exchange rate when we shipped the product was higher.
As I mentioned previous slide, the shipment exchange rate affect the EBITDA while the exchange rate we fixed to financial instrument is a real proxy of the economic impact or the cash generation of Raízen.
‘16/’17 crop guidance assumes a BRL to the dollar of approximately 4. And this exchange rate mostly establishes through financial instruments guarantees the economics or the cash result of Raízen Energia. But the EBITDA at the end of the day reflects the effective exchange rate at the time of the sugar shipments.
If you look at the current exchange rate, would have downside to the EBITDA metric but no impact to the estimated cash generation. Our decisions for now is not to change the guidance as we are in the very beginning of the season and we cannot ignore, not only the volatility or the uncertainty on the exchange rate but also the climate issue. Climate conditions were favorable in the previous crop year and we still don’t know whether the situation will be exactly the same.
This concludes our presentation today. And I’d like to open to the Q&A session.
[Operator Instructions]. Our first question comes from Alexandre Falcao with HSBC.
Hi, actually I have two questions. The first one is regarding your debt planning. Since we’re seeing a huge move on the long-term interest rates downtrend, and the fact that you guys are levered in less than efficient on the cost off of financing? Is, there any plans to take advantage of this and go back to the market and maybe try to redeem some of their market expense of that? That’s the first question.
And the second question is you have [indiscernible] on the news today talking about looking at infrastructure projects. I just wanted to know if that’s going to be done in the CZZ level or in the Cosan level. And which would be those infrastructure projects that you guys would be interested in? Thank you.
Hi Alexandre, this is Mario speaking. Yes, you’re right. In terms of the market as a consequence of the change in government, the market has been improving. For the Brazilian corporates, under that side, we’ve been following and actually our bonds, they have been trading especially well in the past week. And for sure we’ll be following we’ll be following the market and in general, always looking to opportunity to see the debt to capital market.
At this moment there is nothing concrete that we’re looking. But with the following the dynamics of the market, to see if any point makes sense given the debt profile that we have. Just remember we have the BRL bonds maturing in 2018. We have U.S. dollar bonds maturing in 2033. And we have the third, so we keep looking and following the markets to see if a good opportunity might show up in the coming weeks.
But the answer at this moment, there is nothing concrete. But we’ll keep following the market. If very recent, the improvement in the market so, probably we’ll have to wait couple of weeks more or like at least a couple of months more to see if that trend regarding the Brazilian corporates will remain.
I’ll pass to Paula.
And just on that - a quick follow-up on debt. The first one would be that in the Comgas level that you guys were planning to do and of course the market did not allow it. Is that the sort of the, if those conditions are confirmed, could we assume that that’s going to be the first move that you guys are going to do? Thank you.
Look, that was the in the last time that Cosan went to the market that woke the idea. But again, there is nothing complete that we can talk about right now. For sure, one of our priorities to try to improve the tax efficiency because I mean, in terms of where the debt is located at this point is not the ideal vehicle. We know that and we keep looking for alternatives and opportunities to improve that efficiency.
But I mean, maybe we don’t have nothing concrete. But last time that we went to the market, the idea was to, the new bond would go to the gas division. But again, right now we’re still looking to the market and look to the dynamics. As soon as we have anything concrete, we’ll come back to the market okay.
Okay, thank you.
Okay, yes, talking about the possible investments and infrastructure, I mean, there is nothing that we can say other than this is an active group and we’re always looking at good opportunities. And we only move into the opportunities if they make strategic sense and if they use the required returns.
And also if they fit into this market plan that we’ve been talking about which is de-leveraging the company, adjusting the corporate structure and so on and so forth. So there is nothing specific that I can say.
In terms of where investment fit, again, conceptually speaking, we have the operating companies in the fuel distribution, in sugar and ethanol, in gas distribution. So essentially whenever the investment has to do with the business in which the operating company is participating then it makes sense to do downstairs. Whenever a brand new store or completely new business development then, we’ll probably we’ll go through CZZ. But that’s as much as I can say for now, okay.
Okay, perfect. Thank you.
[Operator Instructions]. This concludes today’s question-and-answer session. I would like to invite Ms. Paula Kovarsky to her final considerations.
So, thanks again for attending the conference call. We’ll see you next quarter. Have a nice weekend.
That does conclude the Cosan conference for today. Thank you very much for participation. And have a good day.
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