Cosan S.A. Q3 FY2021 Earnings Call

Good morning, everyone, and thank you for your patience. Welcome to Cosan's Third Quarter 2021 Results Conference Call. Present with us today are Mr. Luis Henrique Guimaraes, Cosan's CEO; Mr. Marcelo Martins, Cosan's CFO; Ms. Paula Kovarsky, Head of IR and ESG; Mr. Joao Arthur Souza, Head of Finance; and Ms. Ana Perina, IR manager. This event is being recorded and simultaneous translation into English is available. After this introduction, we will move to the Q&A session, and further instructions will be provided at that time. We also have a webcast available on our website, www.cosan.com, where you can download the slide presentation. The audio for this conference replay will also be found on the website. Before we begin, we would like to note that any forward-looking statements made during this presentation regarding the company's business prospects, financial projections, and goals are based on the beliefs and assumptions of Cosan's management, as well as information currently accessible to the company. Such statements do not guarantee performance and involve risks, uncertainties, and assumptions that pertain to future events, which may depend on occurrences that may or may not take place. General economic conditions, industry dynamics, and other operational factors could impact the company's future results and cause them to differ significantly from the projections indicated in any forward-looking statements. Now I would like to hand it over to Ms. Ana Luisa. Please, Ms. Ana Luisa, the floor is yours.

Good morning, everyone, and thank you for joining Cosan's Third Quarter of 2021 Earnings Conference Call. For the Q&A session, are also present, Luis Henrique, our CEO; Marcelo Martins, our CFO and IRO; Paula Kovarsky, Head of IR and ESG; and Joao Arthur, Finance Director. Since this is the last public conference of the year, we have a full house here. Going over the financial and operating highlights for business, beginning with Raizen. Last Friday, the company already hosted its own conference call with the market; so I'll briefly go over the main topics of the quarter. Raizen posted record results on a pro forma basis, considering Biosev's figures from April 1, 2021, and also adjusting previous quarters for a fair comparison. First, renewables on Slide 4. Once again, we posted significant EBITDA growth, driven by an improved pricing environment, especially for ethanol. We offer a unique ethanol portfolio of diverse applications, therefore, addressing different markets and sustaining competitive advantages. Lower sales volumes of all products, however, reflect our sales strategy for the crop. The drop in production, following the relevant crop setback in the center-south region in Brazil, was impacted by the intense drought, fires, and frosts. Nonetheless, Raizen's efficiency journey continues steadily on track, represented by higher agro-industrial performance compared to the market, partially offsetting the climate issues. In addition, the typical volatility of PLD spot prices has contributed to improved results in bioelectricity. Now let's move to sugar on Slide 5. The segment faced similar effects in the quarter compared to the renewables, posting lower volumes sold, yet with improved prices. Most of sugar production this year will be shipped along the second half of the crop year according to our sales strategy, leveraging our infrastructure and efficient pricing to maximize profitability and protect cash flows. On the bottom hand side of Slide 5, we present consolidated CapEx of Raizen's agro-industrial operations. The expansion was driven mostly by higher inflation on the cost of inputs, along with additional investments targeting productivity recovery. Now let's go into Marketing & Services on Slide 6. Higher sales volumes year-on-year and quarter-on-quarter reflect a stronger recovery in demand, reaching pre-pandemic levels. Adjusted EBITDA was aligned to the previous year, implying decent profitability. The slight drop compared to the previous quarter is due to gains from our supply strategy, affected by typical price movement in the period. Regarding the other important pieces of our Marketing & Services integrated platform, here are some updates. In proximity, we continue to accelerate the pace of openings, adding 138 new stores to our network in the last 12 months. Numbers keep skyrocketing up to almost 4 million transactions in September. We have already announced that we closed the acquisition of Paraguay's leading fuel station network. We will start to consolidate it beginning in the next quarter. Continuing this presentation with Compass on Slide 7. EBITDA was positively driven by economic activity, both in Comgas and natural gas demand. The pass-through of inflation last May also contributed to record results in the quarter. Once again, Comgas posted impressive distributed volume growth across all segments. Besides the macro scenario boosting performance, the commercial segment benefitted from the lower restrictions. Residential consumption was leveraged by lower average temperature plus consistent customer base extension. In terms of CapEx, the increase is mostly due to the start-up of the Regas terminal construction in Sao Paulo, in line with guidance. Before moving to the next slide, I'd like to highlight the relevant milestones achieved by Compass during the quarter. First, Comgas and the state of Sao Paulo signed the extension of Comgas concession until 2049, allowing us to continue making investments to ensure supply competitiveness, safe operations, and customer satisfaction. Second, in line with Gaspetro's acquisition strategy, we have acquired 51% of Sulgas equity, taking all of our experience to sugar and logistics, aiming to ensure the right capital structure to enable Compass expansion. We placed a second round of private investments. Moving on to Slide 8 to present Moove's results. We had yet another great quarter in our lubricants business, posting decent EBITDA. The drop between quarters, however, implies a strong comparison basis since it captured additional demand from the initial lockdown period, even though the business continues on track to deliver above expectations, capturing benefits from the commercial and supply strategy, influencing the company to review its guidance, increasing again the EBITDA forecast for the year. Moving on to Slide 9 to talk about Rumo. Since Rumo hosted their conference call with the market as well, I'll quickly recap the main effects of the quarter. EBITDA was harshly hit by the corn crop setback. The lower demand for grain prices reduced transported volumes on both North and South operations, which also pressured margins due to its lower weight in sales mix. Even in this challenging scenario, Rumo gained 17 basis points of market share in the port of Santos during the period, reflecting the commercial efforts to maximize the optimization of its operational capacity. Although average tariffs expanded year-on-year, it wasn't enough to offset the rising cost increases, such as diesel and lower dilution of fixed costs. Investments were lower in the third quarter, maintaining capital discipline during the tough short-term environment. Looking to the long-term, we are confident that the business strategy is on track. We have taken an important step by signing a contract to build Brazil's first state railway with the state of Mato Grosso, connecting us to Cuiaba and Lucas do Rio Verde, providing further support to the flow of corporate business exports. Let's go to Slide 10, where we present consolidated figures for Cosan on a pro forma basis. Even though our portfolio faced many challenges related to climate issues in Brazilian agribusiness and macro volatility, we kept our consistent track record to deliver above market average, posting record high EBITDA for the quarter. The levers for the structural recovery of economic activity, a more favorable scenario for renewables and sugar prices, the consolidation of BioSev, and our ability to generate sustainable returns, along with extraordinary effects related to Raizen's IPO, boosted net income for the period, reaching the highest mark in Cosan's history. Moving on to Slide 11 to discuss the financial highlights for the group. We conducted liability management across the board with imported issuances mainly at Cosan Corporate, Rumo, and Compass. Leverage reduced to 2.1 times net debt-to-EBITDA, within ideal levels for the group, driven by greater EBITDA performance over the last 12 months. On cash flows, the better net operational performance of the business was offset by inventory buildup and working capital pressure at Raizen, reducing operating cash flows in the quarter. Investing cash flows included the payment of BioSev's acquisition and higher spending aligned with subsidiaries' investment plans. However, financing cash flows recorded significant expansion, mostly by the proceeds from Raizen's IPO and Compass private placements, supporting a free cash flow to equity at Cosan, exceeding BRL 8 billion. Those were the main topics from last month for our permanent portfolio. We achieved important milestones in addition to posting consistent results. Moving to Slide 12. As a holding, the main highlight is the creation of Cosan Missioning, a new vehicle for the sustainable capital allocation process of the group. The goal is to invest in new business models that can be scaled up by our ecosystem, focusing on sectors where we have competitive advantages, a track record, and opportunities that connect with digital innovations to lead this new initiative with former Raizen's VP for Marketing & Services. Among the contributions from Cosan, we announced to the market the mining JV, the purchase of an additional stake in Radar, the investment in the Climate Tech fund, and more recently, we entered into mobility with the Mobitech JV, partnering with Porto Seguro. Last but not least, before concluding my presentation, I will just go over the recent developments in our ESG agenda on Slide 13. Cosan, represented by our CEO, along with over 100 other entrepreneurs, has joined the business manifesto for climate action, an initiative led by CEBDS to position Brazil as a true green power. Also, as I mentioned earlier, we contributed through Cosan to the Climate Tech fund, managed by Fifth Wall, one of the largest venture capital managers specializing in technological innovation. This fund invests in companies that promote technology and solutions to tackle climate change. This allows us to partner with entrepreneurs, startups, and investors who, like Cosan, are committed to decarbonizing the economy. Rumo issued another sustainability-linked bond, strengthening its commitment to reduce GHG emissions with ambitious targets classified by sustainability metrics. From a financial perspective, this issuance had the lowest yield ever for Rumo, reducing the cost of capital for the company. Finally, Raizen made great progress on the development of its renewables agenda, further expanding its portfolio of cleaner energy. I hope you were able to watch Formula One this weekend, where we launched a Ferrari running on second-generation ethanol. Over the past month, Raizen signed an agreement to supply biomethane to Aura in a pioneering long-term contract. We also won an auction to sell bioelectricity for the next 20 years. We announced a JV with Grupo Gera to enlarge and accelerate our portfolio of distributed generation. Raizen also established a key partnership with Volkswagen and Shell that contemplates initiatives targeting the reduction of GHG emissions, mainly by encouraging the usage of ethanol. ESG principles are indeed the strategic guidelines for the Cosan Group. Our actions reiterate our commitment to the decarbonization of value chains where we operate and to the sustainable development of Brazil. With that, I conclude my presentation. I would like to hand over the call to our CEO, Luis Henrique, for his opening remarks. After that, we may start the Q&A session. Thank you.

Good morning, everyone. Thank you very much for being with us. It's great to be with you to look at our third-quarter results. Ana covered many topics, and I just would like to point out some of the key matters. First, we have made progress in the group restructuring that we have been discussing for a while now, with Raizen's private placing of Compass and several other activities that are part of our long-term vision. We started with sugar to expand our North Grid, and Rumo has established Cosan investments, along with several other investments and initiatives in our group. It's very important to have a structured portfolio with management focused on securing funding and analyzing our long-term activities. That was an important step. It's also crucial to highlight that we announced three major actions for Cosan investments. As planned, we are bringing in key talent to head that area to structure these projects. This focus on dedicated execution of these projects is important. We had record EBITDA, as you've seen. We still have some important topics ahead, along with a positive perspective for crops next year, which will positively impact Rumo and Raizen. Our businesses are back in mobility with vaccination, which is very important for our operations, especially for Compass, Moove, and Raizen. Our carbon agenda is even stronger, and that's a key focus within the Energia transition in both the companies and the government's agenda. We see that as a significant topic moving forward. Also, we have made some key personnel changes at Raizen, which further consolidates our internal pipeline and creates opportunities for growth, particularly in the commercial area and supply chain functions. So we're eager to hear your questions, and we are here—myself, Marcelo, and Paula alongside Ana—to take your questions now. Thank you very much.

My question is about capital allocation. Luis, it's important to mention the pace of Cosan investments. And now probably we'll see a pause there. Out of the investments that you were announcing, some may have different CapEx times. At the same time, with a growing business and improving cash generation and EBITDA, I understand that the leverage of Cosan as a holding is likely not going to be too far from what we have seen now, or maybe even coming down with the EBITDA increase. Considering that, once again, based on Cosan investments, we will not see such an accelerated pace. How are you looking at shares? We see Cosan as a holding. What are you thinking in terms of capital allocation within the group?

Well, Luis quickly talked about our investment strategy via Cosan investments. I just would like to have a brief recap. Cosan investments is the investment arm that we call non-perennial assets, which is something that we had discussed with the market a while ago. We believe that, as this progress happens, we will be ready to announce Cosan investments. Remember, this is another step in the improvement of the group that started with the corporate restructuring. We are currently at a moment where we have announced the most relevant transactions that are ongoing.

So the market should expect a deceleration?

Yes, at this moment, we do not expect to continue at that level of announcements just to make it very clear. Second, we always want to focus on capital structure. This is a group's priority. Our main priority here is risk and exposure management, which is the main objective of the holding. The creation of Cosan investments involves that. We aim to maintain a leverage of close to 2x, which is good for us since it positions us at a more efficient capital allocation level. This approach will not change. We will be buying back shares since we see the current price of shares as much lower than what we believe is reasonable. Consequently, we will accelerate share buybacks for a few reasons. We had to pause while preparing for our results, but now we want to focus on the risk structure of the group's exposure, capital structure, leverage, and buyback. These are our main objectives moving forward.

I have two questions. First, focused on the recent announcement regarding the increase of stake in Radar. I would like to know what has changed in Radar, the Radar that you are reacquiring or acquiring again, compared to the Radar that you divested in the past. In terms of capital needs, what is Radar now? The second question is broader. In your presentation, you talked about tapping into value in the ecosystem. We can think about different combinations or communications among the different businesses. How can we think about that in terms of the ecosystem and the benefits of having an integrated ecosystem in terms of synergy, sharing best practices, and using that from now on?

Let me talk about the ecosystem, and then Marcelo will talk about Radar and explain funds and so on. The idea of our group, Thiago, is to have business independence with focus in management and governance. We started building a process of interdependence where it makes sense to work together. I'll give you a few examples: for instance, information security is a critical topic for all companies in Brazil and globally, and we have made significant improvements in our structure and processes since the attack last year. We had a robust structure, but we learned that we had to improve. We have made a lot of efforts collaboratively, and all the companies in the group benefited from that process. We had to scale up our capabilities to ensure we have the best professionals. Regarding how we work with our client base, we, of course, have to follow the data protection laws and always ensure a shared benefit with all companies. We have internal contracts, and part of the results is allocated to the companies involved. We are making interfaces with all companies to ensure proper governance while also respecting the partners' needs. We have worked on joint purchasing arrangements, which is a huge advancement made in the last year. The result has been decreased costs in services, for instance, contracted jointly. We maintain independence with interdependence, generating significant results that are reflected in our top and bottom lines.

When we announced Cosan investments, our objective was to clarify to the market that this portfolio would be separated from the perennial portfolio in the group, which comprises the main business verticals. We wanted the ability to raise capital to finance these opportunities without diluting Cosan's shareholders' value. By establishing Cosan investments, we can raise fund independently, which separates the portfolio and allows for flexibility in governance. We can also remain committed to a long-term approach with our permanent portfolio. Radar was a great opportunity. When we sold our stake in the company five years ago, the price we had compared to the price we paid now is advantageous, specifically, in dollar terms. We value the sector and are confident in our ability to manage this portfolio since we chose the investments. Very little happened in terms of investments at Radar during the time we sold our stake, as the other parties retain control of the company. Our current decision to increase our economic stake allows us to continue managing that portfolio effectively, which we have done until now.

I think it's essential to understand the nature of risk management within this ecosystem. The solution is to create flexibility while remaining anchored in the best interests of our main shareholders and ensuring all participating companies benefit from this initiative. For instance, we handle shared purchases in a harmonized way across companies. Our portfolio is designed to create excellence in operational disciplines within each sector while ensuring that collaboration drives efficiencies across all operations. I believe that you will witness more collaboration and operational interdependence which will yield significant benefits.

I have three lines of businesses here that I would like to tackle, one regarding capital allocation. I think you have already talked about that, but I would like to go deeper. First, the mining business that you went into recently. What have you done in terms of development and progress in these last weeks? Furthermore, regarding the bid at Sulgas, please provide more context. Finally, I have heard from distributors about a possible reaction regarding Raizen and a strong reaction at Petrobras regarding orders for December. What is your perspective on these developments?

Let me start with your third question about Raizen. The cuts by Petrobras are aligned with market standards; they are not favoring or discriminating against any players. It is about history and the size of supply capacity tied to the sizes of orders placed by each company. I want to emphasize that this process will not disadvantage or advantage any players, except those who did not place orders with Petrobras. It indicates a new paradigm in the Brazilian market, where Petrobras will not ensure supply at any price. This reflects the maturity of the Brazilian market that for years relied on the assumption of state-backed price support. The competitive environment will require all companies to demonstrate their preparedness regarding infrastructure and supply chain management. From our perspective, this opens up opportunities for those with the infrastructure capacity to align closely with contracted clients, enhancing our competitive edge. Moving on to Compass and your earlier question about replicating the Comgas model, our distribution model seeks to focus on client acquisition, infrastructure development, and significantly improving the cost structure while addressing efficiency across numerous segments. Our effort will propagate across south regions where conditions are ideally set for providing natural gas alternatives. We believe this approach will be vital in delivering effective performance and profitability. Regarding mining, we are committed to a long-term focus and just recently concluded the port agreement, which is critical to our operations. We're working on developing the resources, key personnel, and logistics needed to support this project as it matures.

Your comments are very clear. Thank you, and I'm sorry for being so specific in this call.

I have two questions here. First, thinking about this year, the guidance was more controversial in this earnings season. Specifically regarding Raizen, the guidance was lower than our expectations, particularly in renewables, which seems to remain conservative. Can you comment more on this aspect? Also, Cosan's guidance seems to imply a sequential reduction of EBITDA for Moove in the fourth quarter. Can you clarify what we can expect for seasonal demand in the fourth quarter?

We expect that all of them are going to be very close to the top of the guidance. The guidance is a range, of course. We have not updated the Compass and Moove’s guidances, but our sentiment is optimistic. There is nothing in the fourth quarter creating concern for us. We believe we will have significant results. December, particularly for Compass and Moove, tends to see normal cycles of deceleration as industries could face stoppages. Companies are actively working to replenish inventory levels, so we cannot rely solely on those cycles to determine our results. We remain confident that Raizen, Compass, and Moove will perform close to or at the top of guidance while accommodating each segment's seasonal characteristics.

The capital structure allows us to create equity for each of these businesses. The idea is not to fund all of these investments solely through Cosan's debt. Clearly, some capital will be needed, but it should not dilute Cosan’s shareholders' value. We anticipated that the growth of these businesses would depend on equity. Without developing this structure, dilution could occur at the Cosan level. Real estate investments can be capital-intensive; however, our model functions as property managers, allowing us to focus more on operational outputs. We are sensitive about pricing and aiming for a relevant yield, which we expect to meet, given that we finalized at good prices. Each of the three businesses outlined will receive adequate funding without overstretching capital. Mining projects require careful resource testing and are set to be a long-term project with progressive capital mobilization occurring when deemed appropriate.

In your discussion of funding and capital allocation, you could have options to raise capital in the fund or in the investee. When do you decide to raise capital for the investors?

Cosan's fund is managed by us, and our partners will invest there. We will use this capital for the company and will always participate in Cosan's block. Our strategy with this capital will be to direct it to our investments and fund partners. The key is transparency for all our shareholders while ensuring that we maintain control of the management of this fund. As Marcelo has mentioned earlier, we may have partners in this fund that are not part of Cosan's structure, but that is a characteristic lending flexibility to our portfolio.

I have a few follow-ups. First, I'd like to discuss Compass's strategy within the gas market. Could you elaborate on the synergies you foresee? With the new gas law and the separation among businesses, can you clarify how you view these synergies? Secondly, regarding Cosan investments, I would like to understand Leo's role in this arm of the company and the vision for that business.

Regarding Compass, we currently have four verticals that are interrelated to gas and power but are also focused on achieving efficiency within each segment. Our distribution will primarily be about client acquisition and infrastructure development while making sure we have new opportunities to introduce competition into the market. We recognize the critical challenge of generating demand. Although we have a significant supply capacity in Brazil and the international market, ensuring we meet demand is essential. Consequently, we are investing in operations that allow us to scale our fundamental propositions effectively. As for Leo’s role in Cosan investments, he will mainly oversee these initiatives, ensuring they align with Cosan's core principles, emphasize capital discipline, and will cooperate in mentoring and developing people.

I have two questions. First, investors keep asking me about how companies will deal with the Brazilian economy in 2022, which is expected to be more challenging. Could you comment on how Cosan's companies are prepared for this scenario? My second question is about the decision-making process regarding share buybacks and dividends payments. How do you work on that topic?

We actually do both. We pay dividends and buy back shares. In practice, the effects are similar and should benefit shareholders, especially when shares are at lower prices for reasons that seem transient rather than permanent. We aim to do both, and our dividend payment this year should be a record, and we will restart our share buybacks starting now. This was part of our strategy all along and will not change. Each company establishes very clear positions for their dividends depending on their growth needs. Those that require more cash will pay fewer dividends while mature companies will tend to pay more.

When analyzing GDP for 2022, we monitor several scenarios and manage risks for potential downturns. But we also consider that the improvement in agricultural production next season will likely yield positive outcomes, as will the return of mobility next year. These elements are essential for businesses dependent on mobility and agricultural commodities as they are likely to materially affect our trades. Our focus on joint efficiencies and cost management allows us to prepare adequately for such times.

I have one more question regarding Compass. Considering the changes in general pricing in the international market, I want to know how your discussions with potential new clients are evolving in response to higher volatility in gas prices. What is their thinking about this emerging market?

The exploration between short-term spot prices and long-term agreements are key points for us. The gas sector was previously plunged into significant shock due to supply chain interruptions. Our clients now recognize the necessity for carefully structured portfolios to manage contract flexibility and mitigate risks. Our strong presence in both domestic and international markets facilitates diversification, and our clients seek alternative solutions reflecting our expansive firm. Many clients have begun diversifying their needs while understanding product characteristics better than before, which strengthens our competitive position in the market. The market environment remains fluid, and we are committed to continuously refining how we meet client needs.

Cosan's webinar has ended. Thank you very much for your participation. Have a nice day.