Cosan S.A. Q1 FY2024 Earnings Call

Good morning, everyone. Thank you for waiting. And welcome to Cosan's First Quarter Earnings Release Video Conference Call. Simultaneous translation will be available during the session by clicking on the interpretation button at the bottom of the screen and choosing your preferred language, Portuguese or English. Those listening to the video conference in English have the option to mute the original audio in Portuguese by clicking on mute original audio. The video conference is being recorded and will be available on the company's IR website at cosan.com.br. You can also download the presentation through the chat icon, also in English. During the company's presentation, all participants will be in a listen-only mode. The question and answer session will start after the presentation. Please note that the information contained in this presentation and in the statements that may be made during the conference call regarding Cosan's business prospects, projections, and operating and financial goals constitute the beliefs and assumptions of the company's management, as well as information currently available. Forward-looking considerations are not a guarantee of performance. They involve risks, uncertainties, and assumptions as they refer to future events and therefore depend on circumstances that may or may not occur. Investors should know that overall economic conditions, market conditions and other operating factors may affect Cosan's future performance and lead to results that differ materially from those expressed in such forward-looking statements. I will now turn it over to Mr. Rodrigo Araujo.

Good morning, everyone. Welcome to our earnings call for the first quarter of 2024. I'm Rodrigo Araujo, CFO of Cosan, and I'm here to go over the main highlights of the quarter and some details in terms of strategy and management priorities. So starting with our priorities for the year. As we've been constantly reinforcing, we are highly focused on discipline and capital allocation and, of course, mindful of our leverage at the HoldCo level and the OpCos, especially in the high interest rate environment that makes our capital allocation decisions and discipline even more important. We're focused on liability management and portfolio recycling throughout the portfolio. We've been, of course, highly focused on execution in our portfolio to ensure that we maintain our track record in terms of execution. We delivered what has been promised in terms of the different guidances and plans of the operating companies, making sure that we are always taking advantage of the talent pipeline of high-quality people we have and continuously maintaining high safety standards in the group. Finally, we are also focused on supporting and executing the contracted growth coming from the operational companies. So, for example, the structural projects of Lucas do Rio Verde to connect the Brazilian Midwest and agricultural area in Rumo, the second-generation ethanol plants in Raizen, and the natural gas regasification terminal in Compass. Going through our highlights of the first quarter of 2024, our EBITDA under management finished at BRL7.1 billion in the quarter. The difference, when we compare to the first quarter of '23, is mainly related to tax credits that were recognized in Raizen in the first quarter of '23 and were not recognized in the first quarter of '24. In terms of net income, we had the negative result of BRL192 million compared to the first quarter of '23, which was negative BRL904 million. The main differences are the tax liabilities we recognized in the first quarter of '23, and this was partially offset by the results of equity pickup, the negative equity pickup from Raizen in the first quarter of '24 and the negative impact of the mark-to-market of our TRS in the first quarter of '24. In terms of safety, our results in the first quarter of '24 are pretty well aligned with the acceptable limits that we have, even though it's slightly worse than '23. Fortunately, we had no fatalities this first quarter. We continue to be highly focused on maintaining very high safety standards and improving our results focused on zero fatalities and zero accidents. Regarding dividends and interest on capital received, it's generally well aligned with the first quarter of 2023. Our net debt of BRL22.7 billion is also pretty aligned with the fourth quarter. Finally, in terms of interest coverage, which, as you know, we've been following closely since the fourth quarter of '23, we evolved from 1 time to 1.1 times for the last 12 months, focusing on improving our interest coverage in terms of sustainability of our leverage at the HoldCo level. Looking at the overall figures for the portfolio in Rumo, we increased transported volumes and had an important increase in the average tariff. We are also advancing in our project of Lucas do Rio Verde to connect Mato Grosso in the north of the Midwest of Brazil. In Compass, we had an increase in industrial consumption that was partially offset by the higher temperatures that reduced residential consumption of natural gas. We had a negative mix impact due to higher industrial volumes and lower residential volumes. We also had a positive impact coming from Edge, the marketing and services company we started in the fourth quarter of '23, and we concluded our regas terminal in Santos, Brazil. Moove had stable volumes of lubricant sales but substantially higher EBITDA with much healthier margins, continuing its schedule and agenda to improve performance over time. In Radar, our land business, the recurring EBITDA was pretty aligned with the first quarter of last year regarding lease revenues from agricultural properties in the portfolio. The fair market value of our properties was BRL16.3 billion, reassessed in the fourth quarter of '23, with Cosan's stake around BRL5 billion. In Raizen, we had record sugarcane crushing levels at 84 million tons, with significant productivity recovery, especially in the first three cuts. The sugarcane productivity investments we made over the past couple of years are showing important results. We also experienced healthier margins in the fuel distribution segment in mobility and higher sugar prices, partially offset by lower ethanol prices. Compared to the first quarter of '23, we faced negative impacts from tax credits recognized in the first quarter of '23 that were not recognized in '24 and lower ethanol prices. Lastly, with respect to Vale, this was the first quarter we consolidated the results and the equity pickup of Vale's results. We completed the unwinding of our collar financing structure by the end of April. During the quarter, we unwound part of the collar, and in April we sold around 0.78% of our stake in Vale, primarily to reduce the leverage at the HoldCo. This effort aimed at reducing gross debt at the HoldCo level. We concluded the unwinding of the entire structure, and in May, we unwound the first tranche of the call spread, the synthetic forward structure regarding additional Vale stake. Overall, in May, we have a 4.15% direct stake and a 1.43% synthetic forward call spread for optionality. Looking at the EBITDA under management, the major changes here are the better results in Rumo from higher margins and higher volumes, offset by the lack of recognition of tax credits in the first quarter of '24 in Raizen and the lower ethanol prices offset by sugar prices and volume. We reached BRL7.1 billion of EBITDA under management. Regarding our debt profile, if you look at the figures in the first quarter of '24 and April, we concluded the unwinding of the collar structure focused on reducing the gross debt of BRL23.8 billion in April. Our net debt to EBITDA, pro forma adjusted by including the fair market value of Vale's share, is around the fourth quarter, decreasing from 1.8 times to 1.7. The overall cost of debt is CDI plus 1.54%. In terms of the amortization profile, we've increased the average duration of the portfolio from 5.8 years to 6.5, doing liability management and improving the profile, thus substantially reducing amortizations between 2024 and 2027 to better navigate the CapEx cycle in the portfolio. Lastly, in terms of cash flows this period, we received BRL911 million in dividends. Debt payments were BRL3.8 billion. After issuing a bond in January '24 for BRL3 billion, we end with an unpaid balance of BRL2.6 billion, utilizing part of the company's cash to reduce the overall gross debt.

We will now begin the Q&A session with Mr. Rodrigo Araujo and Mrs. Ana Luisa Perina. Our first question is from Luiz Carvalho, sell-side UBS.

Rodrigo, could you give us a bit more detail about your leveraging? Have you got a leveraging target for debt coverage? If I can rephrase my question, at which point will you be looking at capital allocation, investments, or accelerating dividends and buybacks? Would it make sense for Vale to wait for an additional reduction given the influence that you already have with a member of the board? How do you see that? My second question is about regulatory issues at the HoldCo level. Cosan, of course, has ongoing discussions about the concession regulations, the authorization for the regas terminal, Subida da Serra, and renewing tariffs at Comgas. How do you see these conversations? I know they are mainly down to the companies, but how are you seeing these discussions at the HoldCo level?

I'll start with leveraging. We don't have a set target, but a healthy range would be about 1.5 to 2 times for interest coverage. This would allow us to cover the debt service while keeping the HoldCo's commitments and our current dividend payout level with organic deleveraging over time. So we don't have a set timeline to achieve that. We do have levers we can utilize to reach that coverage level, but that's what we consider healthy. As I said during the last call, you will hear us talk more about interest coverage aiming to achieve a balance between dividends inflow and interest coverage outflow along with dividend payouts to shareholders. About Vale's position and size, we made significant moves in the first quarter, which has been stretched into April and May. What we've done since the start of the year is unwinding a collar structure, which was important during our acquisition but consumed dividends that came in from Vale to maintain the fixed positions. We're adjusting to access more dividends and have a duration compatible with our CapEx flow. Currently, we've switched the duration from 2.5 to 7.5 years, adjusting the amortization profile as well. Initially, we sold the 0.78% stake to reduce gross debt at the HoldCo level. This sale considered your mention of political influence and support for Vale and Cosan's stake in the company. We believe that 4% won't significantly affect our influence in the company, but it greatly aids our gross debt reduction at Cosan. We're continuously assessing the ideal size and our maximum assumed position being 4.15%, especially post share buyback. We've also executed on the synthetic forward structure by not exercising the first tranche due in November '24 because we believe the option would lose value over time. We're not keeping it to increase our position, but we have the optionality in this agenda moving forward with Vale. Regarding regulatory issues, we've maintained close monitoring and strengthened our institutional relations structure at Cosan with Nelson's arrival to foster connections among businesses for a joint regulatory agenda since our group shares regulatory issues. With our board member at Vale, we can contribute significantly to this agenda.

As a follow-up on leveraging, you’ve made some important moves since the start of the year. Could you share any strategic moves regarding managing Cosan's gross debt? What's the most valuable source of dividends to expedite the deleveraging process? Are there opportunities within any OpCos similar to those at HoldCo that could facilitate substantial dividend payments?

I'll start with the leveraging side. It's crucial to emphasize that along with our level, the adjusted profile matching our CapEx cycle is equally important. We plan to conduct operations to adjust our profiles in both domestic and international markets. We will be active in terms of profile DCM. Regarding our levels and M&A operations, we have potential assets, and while we don't have significant updates, they are on our radar, including the port. Our expectations for '24 are modest, but we are considering potential listings for Moove and Compass. With respect to performance, CapEx, and dividends, executing our structuring projects is vital. As I mentioned during the presentation, these include Lucas do Rio Verde, the Regas Terminal, and second-generation ethanol. Some companies are nearing the end of their CapEx cycles, while others are still investing heavily. For instance, Compass is already paying larger dividends this year due to the results of recent efforts. Moove is concluding its acquisitions, enhancing its cash generation capability, which will likely lead to larger dividend payouts. We're managing our portfolio and focusing on structuring projects while recycling it, particularly in Rumo and Raizen, where CapEx is more prominent over the coming years, including bringing in partners to help fund key projects.

Could I follow up on Raizen? Given the considerable pipeline for projects and the time required for development, do you think it might make sense to consider a strategic partner for that segment, or is it too soon?

Generally speaking, if a partner adds value and aligns with shareholder interests, we will always consider them. We are open to strategic partnerships for structuring projects, especially if they can enhance value—not just financially but in creating overall value.

I have a couple of follow-up questions. The first is about Vale's position. You have made adjustments to the position. Is this the ideal position in your opinion, or can we expect further adjustments? If further adjustments are expected, what might be the potential triggers? Are you comfortable with the position as it currently stands? My second follow-up is regarding listing. You mentioned Moove maybe in 2024 and Compass afterward. What are the triggers for listing Compass? Would those be dependent on market circumstances or more on domestic issues? Lastly, you have been focusing heavily on controlling leverage and the capital structure, but is there any room for potential acquisitions or short-term investments?

There is no magic number for the ideal position, as we will monitor what is most appropriate for Cosan's capital structure. We are always looking for levers to create value. Recently, we discussed the CEO succession process and regulatory considerations, all of which are essential for unlocking value in the short to midterm. We're comfortable with the current level at around 414, 415 as a maximum for now. If we believe we should taper that position based on the capital structure and liquidity, we will consider that. Regarding listing Compass, it’s not just about market conditions, but various factors like the company's plan execution and pipeline management. Key aspects include tariff reviews and asset investments in our portfolio. These need careful execution to unlock value for any M&A opportunity. In challenging market conditions, taking advantage of favorable timing is crucial to avoid suppressing value creation under pressure.

Regina, can you elaborate on the benefits of Vale? You mentioned the duration, but what about debt service, carryover cost at Vale? Could you discuss your investment thesis regarding Vale? Has it materializing as you anticipated? Additionally, regarding the portfolio, can you describe Cosan's composition across sectors and assets concerning debt servicing capabilities?

To summarize what we've done at Vale, as you stated, unwinding the collar offers both duration and dividend access, which had consumed our dividend funds initially. This restructuring should be monitored closely as it can affect our cash flow positions. Currently, the cost spread and direct stake work to unlock dividend payments while simplifying our structure for our shareholders. About our investment thesis, the beginning of the year presented challenges with uncertainty surrounding the company’s trajectory, which has improved recently. Critical factors like dividends and strategic advances in regulatory discussions and succession processes are driving potential value. Our portfolio itself is in a healthy state, featuring strong assets such as Compass, with its resilience, and Vale offering exposure to hard currencies. Overall, the quality of our assets and the recycling of non-core assets mean we feel optimistic while remaining cautious within the current macro context.

Considering your portfolio mix, how do you view Cosan 9 and 10, the intermediate holding companies? Are they a method to balance OpCo exposure?

No, this is an equity structure and does not grant voting rights. It is primarily for dividend access. We view it as a means to dilute equity risk rather than reduce exposure.

Let's start with Radar. We did not encounter a mark-to-market effect this quarter, yet the company's net income was about 126 million. Should this be our focus metric? Do you see good returns even amidst high-interest rates? What's the cash yield that would encourage selling land? About Moove, can you elaborate on the strategy behind the margin exposure considering strong results but considerable working capital consumption? Are these factors related, or is it seasonal?

Regarding Radar, while yields matter, the company's ability to generate cash and pay dividends has improved. This will support us up through our payment commitments until '26. We're comfortable with this arrangement, and while yields are crucial, it's just one aspect of how we evaluate the business. We implemented a more integrated approach to managing the portfolio for better visibility into strategies, and with their nature as a rotation business, that will appear over time. The expectation is for it to remain self-funded without raising additional equity. On Moove, we’re targeting the right clients. Moove transitioned from being part of a major oil company to operating as a retail business. This presents unique opportunities to capture value. The integration of our recent acquisition, PetroChoice, is accelerating margin capture. Last year was a record for Moove, and we anticipate improved results this year. Working capital moves cyclically; strong performance is expected in the second and third quarters. The fluctuations in working capital are normal, as downtime is scheduled, but over time, we should revert to normal levels as there's a high organic cash conversion cycle.

In terms of liability management, what’s the prospect for structuring operations regarding Vale at the intermediate holding companies? Is there a potential for rethinking those structures to enable more dividends to flow into Cosan's holding company? And considering the focus is on managing leverage, what has been consuming management's time the most from the perspective of the OpCos?

The preferred share structures will allow for dividends to begin flowing from the fourth year onwards. From the modeling perspective, this structure aligns with business payment flows, making it efficient. However, we are currently more focused on liabilities that have less efficiency. As for management focus, we are most dedicated where we see higher CapEx obligations or obstacles, especially because executing CapEx in Brazil is challenging. Thus far, the invested companies are organized and ready to navigate the current cycle, which takes time and attention from management.

Rodrigo, you discussed numerous topics in your responses. To summarize, do you believe that reaching a 1.5 to 2 times interest coverage level is feasible given the burdens this creates for the holding company's ability to pay dividends? Additionally, you mentioned a desire to adopt a broader portfolio view. How is 'portfolio recycling' incorporated into your strategy beyond IPOs?

I highlighted various strategies, but I do not have a fixed timeline for when we will achieve the interest coverage goal since it involves various moving factors. Businesses are exposed to commodity cycles, and we need to factor this into our plans. We will consider possible operational and structural changes consistently. Regarding portfolio strategies, we need to factor in the current macro environment, which has shifted considerably in recent months. It’s not productive to maintain identical plans when the market context keeps changing. So while we are focused on execution, we also need to adjust to our environment. Thanks, everyone for joining us on this earnings release call. Thank you for the questions. Myself, Ana, and the entire financial team at Cosan are here if you have any follow-up inquiries. Thanks, and see you next quarter.

Cosan's first quarter 2024 earnings release video conference is now concluded. For further questions, please contact the Investor Relations department. Thank you for your participation, and have a great day.