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Cosan Limited (NYSE:CZZ)

F2Q13 Earnings Call

November 8, 2012 9:30 am ET

Executives

Marcos Marinho Lutz – Chief Executive Officer

Marcelo Eduardo Martins – Chief Financial and Investor Relations Officer

Analysts

Pedro Herrera – HSBC

Christian Audi – Santander Central Hispano Investment

Operator

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

Today with us, we have Mr. Marcos Marinho Lutz, Cosan’s CEO; Mr. Marcelo Martins, CFO and Investor Relations Officer; and Mr. Guilherme Machado, IR 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 live webcast at www.cosan.com.br/ir. 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. Investor should understand that general economic conditions, industry conditions and other operating factors could also affect to the future results of Cosan’s 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. Good morning everyone and welcome to our quarterly results conference call. I’d like to start by explaining the differences in terms of our portfolio allocation since last quarter. So as you probably know Cosan Alimentos to Camil, initially we actually try to keep 11.7% stake in that company, but we decided to sell 100% of the business to Camil recently, and we close the deal in October and from now on will no longer consolidate Cosan Alimentos.

On the other hand as a function of an increase in our stake in Nevada to the contribution of the residual land we had in Cosan's portfolio. We will from this quarter onwards start to consolidate Radar under Cosan SA as well.

Now turning to page 4, I'd like to start with Cosan consolidated figures, we had an increase of 2.4% in the net revenues of the company, which were in the range of R$6.8 billion in last year’s second quarter. And during this second quarter of 2013, we had net revenues of R$7 billion approximately. We had a jump of 350% in the net income of the company from R$63 million to R$283 million.

The main reason for the increase in the gross profit compared to last year’s performance have to do with operational efficiency captured mainly at Raízen’s upstream business and a positive effect of the exchange rate variation when compared to the second quarter of 2012. When we compare the exchange variation, for the first quarter of this fiscal year, we had a negative impact of approximately R$20 million in this quarter. The EBITDA also increased 6% from R$677 million to R$720 million and EBITDA margin jumped from 10% to 10.2% in the second quarter.

Now moving to the separate business units, I would like to start with Raízen Combustíveis, we had an increase in the volume sold of almost 5% compared to second quarter of 2012, and we had actually growth in the volume sold of all products except for ethanol where we had a reduction of approximately 30 million liters in this quarter compared to last year’s second quarter. The net revenue also jumped by 10% and the biggest increase actually happened in the diesel sales moving from R$4.15 billion R$4.16 billion, and we also had a major increase in the sales of gasoline and aviation fuel or jet fuel. Again as a function of the reduction in the volume and the reduction in the price in the domestic market, we also had a reduction in net revenues coming from the ethanol business.

The EBITDA margin jumped from 53.4% and there was an increase of 26.5% in the EBITDA of the company moving from R$297 million last year to R$376 million during this fiscal quarter. We had an EBITDA per cubic meter of R$71 million as a function of R$25 million non-recurring impact on the EBITDA during this quarter as the function of certain write-off in assets that were sold last year, and had not been actually written-off at the right time.

So we’re actually reducing R$25 million in the normal EBITDA of the company in this quarter as a function of this write-off. So I would strongly recommend to consider R$71 million per cubic meter as the actual EBITDA for the company during this quarter as we based on recent market performance believe that this number should be sustainable during the rest of our fiscal year.

In terms of Raízen Energia, even though we had an increase of almost 4% in the sugarcane crushed moving from 26.3 million to 27.3 million tons during this quarter, we had a reduction in ethanol production of 4.4% and an increase in sugar production of 1%. We also saw an improvement in the TSR moving from 143 to 147 kilos per ton in this quarter, but within this year what we are seeing is a reduction in the TSR which despite the increase in the volume crushed should not have any growth in the production of sugar and ethanol during this fiscal year.

In terms of the Cogeneration volumes sold, we had an increase of 46% as a function of three new meals increasing their Cogeneration capacity and the fact that we had also some trading activity going on for power sold in this second quarter.

In terms of the financials of Raízen Energia, we had a reduction in the net revenues as I explained before of 15% from R$2.7 billion to R$2.25 billion in this quarter, but the reduction in the net revenue was compensated by better margins or a better EBITDA margin which comes from 31% to 38% in this quarter, representing an EBITDA of R$856 million for Raízen Energia during this second quarter.

When we look at the hedging operations up to the end of the second quarter, we were at 85% of our overall volume of sugar to be sold, being already hedged and 22% for the projected sugar to be sold next year’s or during the next crop season being hedged at this point in time. We have also as we normally do hedged the exchange rate and the average price or the average exchange rate for this fiscal year is at R$1.96 and for the next fiscal year it's at R$2.17.

Now I want to talk a little bit about Rumo. Rumo had a reduction in the volume respectively loaded during this quarter, but that reduction in the volume was offset by better prices which ended up increasing our net revenues by 2%. So we were presented R$218 million in net revenues with an EBITDA margin higher than last year’s at 39% with an effective EBITDA in the range of R$86 million, representing a 11.4% increase over 2012.

Again, as I mentioned before, first quarter where we will consolidate Radar. Radar’s revenues derived mainly from the activity of leasing rent, the appreciation of the land portfolio and actually the assessment or the revaluation of the land portfolio that takes place every quarter based on an index called (inaudible) and a second evaluation that has performed yearly based on the assessment done by an independent appraisal.

So what we had during this quarter was net revenue of R$21 million for Radar, out of which R$16 million came from the land lease and R$5 million came from the sale of a property during this quarter.

Radar’s EBITDA margin is very rich, it’s been around 90% and the reason for that is because the company has a very slim corporate structure, very lean corporate structure as we have a small group of people that work on the identification and acquisition of agricultural land and also the same team interfaces with farmers in the process of leasing the land in our portfolio, mainly to big agricultural production companies like [Hyson] and FLC. So we have also projected an EBITDA for radar during this fiscal year as we will see at the end of my presentation, we have included it in the guidance for our 2013 results.

In terms of the other businesses, as you know well, we are talking basically about the lubricants and specialties business. We had during this quarter the incorporation of Comma Oil and Chemicals in the UK which was an acquisition we have recently made, and therefore, an increase of almost 28% in the net revenues of this business. As you also know, we allocate under this other business line 100% of the corporate expenses related to Cosan and therefore we have an EBITDA close to zero during this quarter and it varies based on certain contingencies that we have in our balance sheet as a function of the sale of leasing and other corporate expenses at the Cosan level.

In terms of the net debt position on a consolidated basis for Cosan, we had net debt of R$3.463 billion in this quarter, which was very much in line with last quarter's net debt position. We had a capital subscription that was done by Shell to Raízen which had a positive impact on cash position of the company. We also with the consolidation of Radar have increased our cash position within the cash that was sitting at Radar when we consolidated the numbers.

So when we look at the last 12 months, the EBITDA or the net debt to EBITDA ratio is in the range of 1.4 times. Our currency exposure is roughly 60% in U.S. dollars and 41% in Reis and the bulk of the maturity of our debt is long-term roughly 75% and 25% in short term.

Just to talk a little bit about the guidance for the year of 2013, we have basically revised the volume of sugarcane crushed to range a 54 million to 56 million tons, it's a function of an increase in the crushing of cane in the south-east region. In our specific case, we’ve had a very good quarter in terms of crushing performance, but that increase in the crushing should be offset by a reduction in TSR over this crop year and we do not predict any increase in the volume of sugar or ethanol sold until the end of this fiscal year of 2013. We have also changed slightly the forecast for the Rumo’s EBITDA which is now in the range of R$250 million to R$280 million, which is slightly lower than initially projected EBITDA for this fiscal year and the reason for that is actually a reduction in the sugarcane availability in the system for the railroad transportation and the loading at the Port of Santos.

We have also included Radar’s projected EBITDA which we believe will be in the range of R$120 million R$140 million and we have not updated Cosan’s consolidated EBITDA because we think that the reduction end of the last EBITDA will be actually compensated by EBITDA been generated by Radar.

For the closing of the second quarter, we had three subsequent events, which are widely known to the market at this point in time, which was the conclusion of the acquisition of Comgas 60.1% stake that belongs to BG at R$3.4 billion which took place this last Monday, the 5th of November.

We have also concluded the sale of (inaudible) or Cosan Alimentos to Camil in the amount of R$151 million and we continue with our conversations with ALL’s shareholders and with the objective of acquiring a minority stake equivalent to 5.7% of ALL from these shareholders. We don't have any transaction closed yet looking to make progress in the conversations with these shareholders we will probably now move to the discussion around the corporate governance of the company as well as the business model for ALL moving forward. And as soon as we have any news or any relevant improvement in the negotiations, we will let the market know.

With that, I’d like to turn back to you, and Marcos and I will be here to answer your questions. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now being the question-and-answer session for investors and analysts. (Operator Instructions) Our first question comes from (inaudible) with CIAA.

Unidentified Analyst

Hi, congratulations on the results. I just had a question regarding sales volumes particularly of sugar. It appears though your sugar production is about 1% however the volumes were down close to 20% year-over-year. So I was just wondering the cause of that? And also I was wondering about the continued decline in domestic sugar prices and what your outlook is there?

Marcos Marinho Lutz

The reason is this year the sales profile is pretty much, let's say flat, last year we had big – this last quarter, so the comparison year-to-year have that let’s say that reduction because of the total year reduction very much in the sale we will be probably very in line (inaudible). In terms of domestic prices, can you be more specific in terms of which market, because domestic markets are quite fragmented in various niches, so, (inaudible).

Unidentified Analyst

Yeah, just I guess your largest market just how are you seeing prices developing. They seem to have that declining as compared to the export market?

Marcos Marinho Lutz

Okay in what concerns sugar, the largest market is international and again the total sugar market is very correlated with the New York 11 screen and so the end our feel for the New York 11 prices we have to basically what you have already accounted for is that you have a larger production next year in Brazil, you have a possible reduction in crops in India. With that reduction goes a little larger than expected. We might have price spike if not probably prices would be in the range the year today may be varying little bit out side.

On ethanol, I think we're in a very narrow range today between gasoline prices sold domestically and export guarantee. So we are kind of stuck in the middle of those two prices with a big chunk and say very relevant percentage of possibility of having prices of gasoline commented by Petrobras having in the next 12 months an increase. So if that happens, you have an upside in ethanol prices that is quite significant.

Unidentified Analyst

Thank you.

Operator

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

Pedro Herrera – HSBC

Good morning, gentlemen. Thank you for the [questions and congratulations] on the earnings. Couple of quick questions, one is your margins has rising (inaudible) were very strong. Are they sustainable over the medium to long term? Second question quickly is, how do you see the market in the six to 12 months in terms of your ability to reasonably acquire additional assets in terms of sugar mills et cetera, with the M&A opportunities that you think might exist going forward?

Marcos Marinho Lutz

Pedro, in terms of sustainability of downstream margins, I would say that they are at this point in a very stable situation. We believe there is upside not in fields in fact, but downstream has also other sources of EBITDA. I mean not to say margins in convenience stores, margins in let’s say payment methods like credit cards and things like that, those are not very, lets say not explored through the potential at this point in rising, so this is a strong effort started two years ago that will bring additional margins. So I think answering your question, yes the margins are stable, they can grow but marginally not having gross to the growth we have in last three years, because we had actually captured most of the synergies we were seeking to capture at this point.

A more concerned M&A on upstream. We don't see, there is lot of opportunities, but not necessarily good opportunity. I mean we have 40 plus possible assets to acquire, but we are actually – as we always say, we're very disciplined, we don't see the right market now. We don't see the risk return at this point paying out for this move. So we are not active in that area, we always analyze our M&A areas during the company, do see everything and explore possibilities, but we – I mean this is not getting to our threshold of let’s say profitability for an investment.

Pedro Herrera – HSBC

Okay, thank you very much.

Operator

Our next question comes from Christian Audi with Santander.

Christian Audi – Santander Central Hispano Investment

Thanks. Hi Lutz, quick question related to (inaudible) what would you say would be the recurring EBITDA if we consider only the leasing revenue given that it’s very hard to predict when your sell land. So if I just have a sense of recurring EBITDA for them on the leasing side what would you guide us to?

Marcos Marinho Lutz

Leasing will be roughly R$65 million growing with absolutely without an acquisitions and stuff like that. It’s important to say that I will have let’s say three things affecting the EBITDA, so the sale of land affect. We have obviously a pipeline of small portions of land that we sell for high prices, the way, I mean above the price of the valuation that we have. So this happens when the portfolio grows, those opportunities appear more and more. So this will be recurring as well, but I mean this will be beyond the R$65. And also another recurring EBITDA, but again non-cash in this case which is because of the IFRS rules we will see on the EBITDA the appreciation of portfolio. So in that case, you will see let’s say something between 5% and 16% of appreciation per year of the total portfolio that will be on the EBITDA line, wont be on the cash line. Okay, so this something, but going back to your question in terms of lease, at this point portfolio will deliver something like R$55 million.

Christian Audi – Santander Central Hispano Investment

Okay, understood. And then the other question changing to the distribution side, as you look at the drivers that has allowed the product mix of gasoline and diesel versus ethanol having been sold quite positive to you as you look out to 2013, any change in your views that this mix can continue to remain positive, any threats or any concerns you may have of trend in the market that may somehow change this mix or are you keeping continually positive view that the mix have on oil (inaudible) diesel and gasoline should continue to help your distribution renewal into next year?

Marcos Marinho Lutz

I'm already positive; I don't think this won’t change in the medium run. Obviously it’s not say that, if you have a steep increase in gasoline prices this will impact positively the sugar and ethanol production. So Raízen Energia will have a very important positive impact. Year end, we will have a reduction in demand probably. So the market will think a little bit when you start selling at higher prices, the product distributing it will reduce your volumes and therefore you have smaller number on the downstream side.

In that case, the exports of ethanol that we saw this year, a number that you have seen this number above about 2 billion liters to 2.5 billion liters will probably sold at least half of that, another half will be industrial grade, but half of that will be sold domestically with lower margin than gasoline is normally sold. So that's kind of the picture, but again nothing here that we will change dramatically the scenario, I mean this is really marginal stuff.

Christian Audi – Santander Central Hispano Investment

Okay, can you just give us an update on the rebranding process did in the last conference call in terms of how many gas stations you’ve already fully rebranded or signed a contract on and any color in terms of where you are as of the end of this quarter in terms of the big branding how many gas stations have been done and how many are still left to be done?

Marcos Marinho Lutz

There is, I mean on page 7, a more detailed number there. We are at this point in 83% already rebranded, we plan to finish this year. So this is developing faster than we anticipated.

Christian Audi – Santander Central Hispano Investment

Right. So as we go into 2013 given that you’ve done such a great job in 2012 in making this rebranding happen more quickly than we expected, what will really be the driver for continual improving EBITDA for cubic meter margins is taking over [wise lags] or is there another driver that could continue to push this R$70 per cubic meter higher into 2013.

Marcos Marinho Lutz

I mean as we always say, we always can handle a little bit of cost marginally. Yes, you are right. I mean rebranding wise lags is still an important trend. And I think what is major here and something we are little, let’s say behind and we are actually accelerating after at the end but we have a very strong potential on that. And I believe to bring important results on the next couple of years is on the convenience stores, is also – I mean we have very aggressive program there. We are growing very fast and we have a lot of contracts already signed to implement our modeling in convenience stores and then our current fuel sites. And also let's say payment matters I mean credit cards and other things that we also can expect additional values. So those drivers altogether, I mean they allow us to not only maintain the current level, but grow them little bit more.

Christian Audi – Santander Central Hispano Investment

Can you just remind me on the convenience store how many you have now and what’s your plan in terms of growth for this year and next year in terms of how many convenience stores you would end?

Marcos Marinho Lutz

We have 720 at this point. We have 4,500 stations in total. We have a plan to have 1,500 convenience stores in the coming years, but again I won’t be specific here because we don't have let’s say a budgeted number for next year that I can actually tell you at this point.

Christian Audi – Santander Central Hispano Investment

Great. And the last question in the ALL, you can afford just to wait until the control and shareholders of ALL figure out a solution in sales or does it come a point that just run out of patients and time, it’s kind of little bit about your mindset in terms of just keeping waiting for something to finally happen on that front.

Marcos Marinho Lutz

Again, this is more than action, so they’ve been sometimes more active and sometimes less active in that discussions. We're involved in some point. I mean more recently I think the trend is to accelerate this process. I think the whole incentives mode and let's say opportunities everything are actually becoming more and more clear. So everybody is more and more let’s say incentivized to make this happen. On our side, I mean we don’t have a time level and say you know what, I’m not talking more. We have probably as we always say, we have discipline to basically say, okay I will do a deal that makes sense, and that’s it. But I’m not leaving the table because of the time expired, and also not working three days a week on this. We are committed, we want to do this. We believe it’s very important, makes all the sense to do this given where we want to be in the future. I mean the fact that we are to be stronger in infrastructure and energy. I mean this brings a lot of alignments with that direction that we won. So that’s kind of what I have to say. There is nothing more than that.

Christian Audi – Santander Central Hispano Investment

Okay. Thank you.

Operator

(Operator Instructions) Our next question comes from Mr. Jason (inaudible).

Unidentified Analyst

Hi, good morning. Just my question on the Raízen Combustíveis‘ business, when it comes to the volume growth, how much the value dependence on GDP growth or quarterly GDP growth. Did you look over trends, say over the last couple of years and even now? I mean to say very important to sell organic volume growth in that business?

Marcos Marinho Lutz

Jason, diesel sales is very correlated with the GDP growth, gasoline and ethanol sales actually have been growing a lot faster than GDP, and the big driver there is new car sales, and car sales is being incentivized in Brazil quite a lot, so I mean the combination of the – then you have aviation fuel that is obviously related to air traffic and then how much, I mean how many airlines are, how much airlines are flying in Brazil, domestically or internationally and this one has also a stronger correlation with GDP so we have a combination of GDP, and kind of retail of the GDP which is that combined with the car fleet the has been actually surpassing substantially the GDP growth.

Unidentified Analyst

Okay, very helpful. And then just on that 4.8% volume growth for the quarter, how much of that comes from existing stations versus growth coming from these stations in the quarter?

Marcos Marinho Lutz

I mean there is a lot, I mean when we convert, we rebrand an old shell site or old [asset cycle] the shell brand, normally the volume increased more than 10% between 10% and 15%. So that's an important driver, we've been doing that quite a lot. When you switch the mix from gasoline to ethanol which is the opposite of what we're doing now, but when you do that, you improve also your sales because to the same mileage you have to sell more cubic meters by 70% relation here, so you need 30% more ethanol than gasoline to run the same number of miles. And I don't know, I don’t have the number to give to you calculated here in front of me, but I have to say that probably more than half of this number is without new or existing – addition of new stations.

Unidentified Analyst

Thank you very much. And great job in the quarter.

Operator

(Operator Instructions) This concludes today's question-and-answer session for investors and analysts. I would like to invite Mr. Martins to proceed with his closing statements. Please go ahead sir.

Marcelo Eduardo Martins

Thank you. Well, I just wanted to remind you our Cosan Day next week in New York on the 12 November starting at 8:30 am at St. Regis Hotel, in 55th Street, at Fifth Avenue. We will have the whole team of top managers of our company. And we think it will be a very good opportunity not only to talk about the improvements in our business portfolios, but in terms of our plans moving ahead, with a main focus on increasing our operational efficiencies. So I would like to invite you once again to be there Monday and we hope that you have found this meeting helpful and we will see you Monday in New York. Thank you very much.

Operator

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

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