Cosan S.A. Q2 FY2024 Earnings Call

Good morning, everyone. Thank you for waiting, and welcome to Cosan's Second Quarter 2024 Earnings Release Video Conference Call. Please note that the information contained in this presentation and in 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 materialize. Investors should bear in mind 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.

Hi, everyone. Welcome to our earnings call for the second quarter of 2024. So starting here with our priorities, management priorities. Just I'd like to reinforce what we've been discussing over the last couple of quarters. We're mainly focused on having a lot of capital discipline, especially given the leverage at the holdco level and much more challenging interest rate scenarios with higher interest rates for a longer time. So we're focused on executing the projects of the portfolio, delivering what we set up in the business plans, and of course, always focused on managing our talents in the group and providing the highest safety standards. With capital discipline, of course, we're able to support the contracted growth of the portfolio by ensuring that we continue to invest in the structural projects of the different businesses. So moving on to the next slide. We have our EBITDA under management moving from BRL 6.2 billion last year to BRL 7.1 billion in 2024. We had a negative net result of around BRL 200 million in this quarter. And looking at our safety record in this quarter, we had 0.24 LTIF, which is quite close to what we had in the first quarter of 2024. And of course, we're always looking for better results in terms of operational efficiency and safety, but this result shows the track record of evolving safety standards within the group. In terms of dividends and interest on capital received this quarter, we see a very important result and an important evolution compared to last year. Of course, we highlight dividends paid by Compass and Moove, which, of course, are becoming more relevant dividend payers within the portfolio. You see that we had a slight decrease in our corporate net debt and an important increase in terms of our debt service coverage ratio in the last 12 months, moving from 1.1x to 1.3x in the second quarter of '24. Moving on to our next slide, we show here the overall results of the different businesses. In Rumo, you see that we had higher transported volumes and important increases in the average tariff, which translated into more relevant EBITDA for the business during this period, with important operational results and market share gains in the Santos Port. In Compass, we saw lower volumes in the residential segment given the higher temperatures in the period. Of course, we see an increase in the industrial demand with the industrial activity in Brazil picking up, but overall, we see lower volumes on an annual basis. We also had a lower margin given the distribution mix with the decrease in the residential volumes. However, we also had operational startup of the regas terminal in Santos here in São Paulo and Edge providing recurring results, not only with the regas terminal, but also with different sources of supply from the Brazilian pre-salt and Bolivian gas, as well as connecting new consumers to the open gas market in Brazil. In Moove, we had stable volumes in the period, but we continue to see relevant margin expansion and the execution of the commercial strategy and procurement intelligence, delivering important growth in terms of EBITDA in the period. Radar had lease revenues in line with the second quarter of '23 and a reduction in EBITDA, mainly due to the mark-to-market of the land that we had in the second quarter of '23 that did not occur in the second quarter of '24. We expect to do the annual appraisal closer to the end of the year in '24. In Raízen, we started sugarcane crushing at an accelerated pace with 31 million tons in the period, but this did not reflect in higher EBITDA due to a delay in the commercial strategy. So we had delays in the commercialization of our sugar and ethanol volumes, which we expect to compensate over the course of the year. On the other hand, in the mobility segment, we see an expansion of the margins, much healthier margins. The fuel distribution margins in Brazil not only increased but are also staying at a much healthier level in this year of '24. Vale contributed with an EBITDA of BRL 800 million from the equity pickup method. In this quarter, we also had the impact from the sale of 0.78% of our stake in Vale and the unwinding of the remaining portion of the collar financing structure. We ended up the period with a little over 4% stake in Vale, specifically a 4.1% stake, and the optionality of the co-spread structure with an additional 1.4% of optionality in Vale. So we see that the next slide, the EBITDA under management evolved from BRL 6.2 billion to BRL 7.1 billion, and the results were mainly impacted by the factors I've just described across the several different businesses. Finally, moving on to our cash movement in the period. In terms of sources, as I've mentioned, we had dividends coming from Moove and Compass, around BRL 2 billion dividends, mainly from Moove and Compass during this period. We also had portfolio management, specifically the sale of 0.78% of our Vale stake. We issued BRL 1.4 billion worth of debentures in Brazil, mainly used to repay principal and interest. We distributed dividends to our shareholders, especially from Compass to our preferred shareholders during the Cosan days. So we had our cash balance moving from BRL 2.6 billion to BRL 4 billion. And as a reminder, we have around BRL 1.4 billion that we're still going to use in August for liability management. Thank you for joining us in our earnings call, and we can move on to our Q&A session.

We will now begin the Q&A session with Mr. Nelson Gomes; Mr. Rodrigo Araujo; and Ms. Ana Perina. Our first question is from Luiz Carvalho, UBS.

Great, and congratulations on reducing the debt this quarter. Rodrigo, let me take the opportunity of your presence to discuss the liability management at the holdco level. That's probably one of your priorities given your leverage ratio and the potential to deleverage. You've mentioned it, but if you could provide a bit more color on the priorities? So you had the initial filing at Moove for a potential IPO. How do you see these advances and uncertainties when it comes to Compass with the Subida da Serra? You also touched on Vale. What can we expect in terms of position size without losing representativeness at the Board? So if you could give us an overview of what we can expect over the next 12 to 18 months, that would be great. Second question, based on the debt reduction this quarter, doing the math and considering the holdco discount, it looks wide open. So how concerned or are you concerned about that? And what could you potentially do to achieve fair pricing when it comes to the assets?

Luiz, thanks for the questions. To your first question, I'm giving you an overview. You know that we've been quite vocal about that. We are highly focused on capital allocation. Obviously, leverage is a priority in our agenda. It is a point of concern. Since the company's capital framework was adjusted, we've been working on that, looking at interest rates, so that we can have interest coverage that is sustainable over time. So you know we've been working on that. I think in terms of liability management and the structure as a whole, we did what was most urgent. The first half of the year was highly active. We earn well on Vale's collar financing completely. We also did some fundraising to address the two amortization towers we had for '24 and '25. So our profile is much more suitable for the group's investment cycle. We will have major investments over the next 2 to 3 years without any maturities until '27. So in terms of profile, I think we're looking pretty comfortable with what we've done so far. Obviously, if there are any opportunities considering the right cost, prices, and maturities, we do have options like outstanding bonds. There are other potential transactions that can be done, but it would be more strategic. It's about the right timing and opportunities. Now moving on to your point about our portfolio, what we see is that the business is executing the plan. When we talk about disciplined capital allocation, considering the current interest rates, and that can be reflected in all of the group's companies, everyone has been more disciplined. You've been seeing what companies have been doing regarding investments and divestments in their portfolios. And that will be an increasingly more natural move. If you listen to Rumo's call, you will have heard about that. So it will become even more natural. About Subida da Serra, there are no relevant impacts. As shareholders, we're monitoring it because it’s a relevant topic, but there are no updates or points of concern about that. And finally, regarding Vale, I think that in addition to what I talked about in terms of the collar unwinding this semester, we adjusted the size of our position, so we sold 0.78% of our stake, which was used to reduce the debt. We have been focusing on deleveraging the current level, which is close to 4.1% and 1.4% of the co-spread of that future optionality, and we are not looking at increasing our position. We'll continue to monitor things closely and find the best capital structure, balancing that with our ability to influence. So we're always keeping an eye out for that, but there are no changes on the radar for the short term. So that's the level, and we don't expect it to change, especially to increase. Regarding the discount at the holdco level, yes, it does bother us. Obviously, we couldn't be comfortable about that. But on the other hand, we are doing what we know will create value, which is deleveraging, transferring that value to equity, executing on projects, and ensuring that projects are executing on the CapEx and meeting contracts with disciplined capital structure and allocation. That's what we've been working on to close the discount at the holdco level. So we're not comfortable about it, but we are working on what is under our control and what we know are value-creation levers. Thanks for the question.

The next question is from Gabriel Barra, Citi.

I have questions about a couple of topics. The first one is regarding Vale. You mentioned a reduction and that you've unwound the collar, with a co-spread and over a 4% position in Vale. How are you looking at this moving forward in relation to deleveraging? Should we still view Cosan's investments in Vale as a core asset? While I understand you can't share your exact plans, a bit more insight would help us comprehend how the company is managing deleveraging. The second point concerns the debt service coverage ratio. You mentioned being at 1.5%, yet you're close to 1.3%. What steps will you take to deleverage, and what should we anticipate in terms of deleveraging over the next few years?

Thank you, Gabriel. Thanks for the questions. I'll start with the first question, which is about Vale. As you said, we have readjusted our position regarding Cosan's deleveraging. In terms of the portfolio as a whole, and that applies to our investment in Vale, we don't expect to make any significant changes in our portfolio mix and the verticals and the relevant businesses in the portfolio. In the specific case of Vale, we'll be monitoring it very closely. There are many relevant events that are ongoing that have the potential to occur over the next 12 to 18 months. So we're monitoring that carefully and don’t expect any changes. We are balancing leveraging with the size of our stake to ensure we can continue to have an influence. So no changes on the horizon, but we will be monitoring it closely. About the interest coverage, we know that the dividends flow is something that happens throughout the year, and it's not linear. There will be fluctuations in that number, although we have celebrated the increase to 1.3. The dividend payout cycle is not a linear process, but bringing it to 1.5x. Just to share some of the rationale, 1.5 is something we believe is enough to cover the debt service and the holding company's existence costs, and that's on our agenda. So how can we make the holding company more efficient, more streamlined when it comes to costs? Additionally, we can organically deleverage over time without necessarily depending on portfolio management. The 1.5x is based on that rationale. So having a more sustainable 1.5 would allow us to be more organic. We have no set date to get there, but I don't think we'll consistently go over that level before the end of '25. We're working to get there as soon as possible, but there is no set date; it's more of a target for sustainable management of our portfolio going forward. I have been very vocal about how important it is to deleverage, but it's also important to point out that we don’t want to compromise the quality of our portfolio to do that. Deleveraging is key; there is an opportunity to transfer value from debt to equities. It is on our radar. It's important to us, but that needs to be done by maintaining or improving the same level of quality. We're not just looking at one side of the equation without looking at the whole. Thank you for the questions, Gabriel.

The next question is from Monique Greco from Itau BBA.

Rodrigo, I have a follow-up question about your comments. For some time, you have reiterated the importance of ensuring that you have the right CapEx execution considering a more challenging macro environment, especially given the interest rate. Now you've just said we have been seeing some natural movement in terms of managing the portfolio at the subsidiary company. Considering the current investments made by the subsidiary companies and what's planned, what would you say are the main challenges to executing your CapEx? And where do you think there’s more room to adjust the investment plans to face this challenging macro scenario? The second question is about Radar. Usually, there's an assessment in the second quarter, and it didn't happen this time. How are you seeing the current land market, both in terms of liquidity and appreciation? Also, if you could comment on your JV with Nuveen for the land portfolio management, that would be great.

Thank you for the questions, Monique. I'll begin with your first question regarding our capital expenditure execution and discipline in portfolio allocation. Ana will address your inquiry about Radar. Concerning our capital expenditure execution, the primary challenge lies in the current complex interest rate environment and the necessity for higher returns, which affects everyone. Cosan and other businesses that are focused on capital expenditure are grappling with both the returns on their projects and the execution challenges related to capital expenditures. We acknowledge that managing capital expenditures in Brazil is never straightforward, so both return and execution issues are significant. Regarding portfolio management, I mentioned this earlier, but it’s crucial to provide some context. Our portfolio has undergone changes with terminals being sold, and partners changing at Rumo. Strategic decisions at Compass have involved retaining part of the portfolio while divesting others, focusing on strategic acquisitions and removing areas where we believe we aren't the best shareholders. At Raízen, some of the distribution and generation segments have been sold. It's difficult to pinpoint where challenges are more pronounced; the challenge of optimizing or cutting down on capital expenditures is widespread. We aim to maintain strict discipline in this regard consistently. While I won’t mention specific opportunities, the key takeaway is that we will continually assess our approach to both growth capital expenditures—aiming for the growth we desire while managing it efficiently—and recurring capital expenditures. Improving efficiency is an ongoing challenge, and I am actively involved in overseeing capital allocation. Now, I’ll hand it over to Ana to discuss Radar.

Monique, about Radar, we have a recurring process at the company to reassess the portfolio value. So seasonally, there are may be times when pricing indicators on the land go up, and there are changes to the portfolio, but the most relevant changes we see yearly where we have reports from independent consultants validating the portfolio value happen in the third quarter. That's when we do the appreciation. Now ever since we increased our stake in the businesses, we have had significant returns, riding on great crops in the last couple of years, commodities have had historical yields and high prices. So that has already increased the value of the portfolio considerably already. As you said, as we consolidated our JV with Nuveen and began managing the whole land portfolio, not only will we have a stake, but also the other portfolios, both in Brazil and internationally where Nuveen has a stake, that opens our opportunity horizon to potentially recycle the portfolio or increase its value. But like Rodrigo said, there are always opportunities to assess to recycle the portfolio and increase returns for the company. Thank you.

The next question is from Bruno Montanari from Morgan Stanley.

I have a couple of follow-up questions, please. One about recycling the portfolio. The largest contribution, will it come from internal decisions from the subsidiary companies—so more dividends coming into the holdco or potential moves carried out through the holdco? So listing new businesses, private placements, and up to what point can Cosan influence the decisions that might be made by the subsidiary companies? Your spread on CDI has decreased slightly with the refinancing. Do you think you've reached the maximum spread compression? Can you reduce the cost of debt a little bit more?

Thank you, Bruno. I'll start with the first one, and then I'll talk about the spread. Regarding our portfolio, it's a combination of things. Obviously, I mentioned this in my last answer, but I'd like to reiterate the desire to see businesses grow. We want to capture the value that comes from strategic projects. We're not going to compromise the quality of our portfolio or the execution of strategic projects. The required return levels in the current scenario are higher, and that's clear to everyone. Evidently, in terms of moves made at the holdco level, we're working towards that, but selling large businesses is not something that happens overnight. So we're constantly looking at opportunities, but it is also important to point out that we want to maintain the quality of our portfolio. Anything that happens at the holdco level will combine deleveraging and high quality across the portfolio. As for having an influence on the decisions made by the subsidiary companies, ultimately, what we bring in terms of value creation to the portfolio is presenting the right challenges, best practices; having a vision as a whole helps us see the portfolio and share synergies across the different businesses at different times. We want to ensure we have the right return levels, and that's the contribution we make toward creating value. That doesn't mean we're going to change any decisions; we want to enhance the decision-making process without trying to run every business each day. Regarding the spread and liability management, clearly, there are consistent opportunities to reduce cost and bring down the average cost through different operations. What used to be more urgent, as I said at the beginning, we've already attended to that. Now we need to find timely opportunities regarding cost, improving duration, reducing costs, but there are opportunities to tighten those spreads, and we will make the most of those. Thank you for your questions.

The next question is from Bruno Amorim from Goldman Sachs.

I have a follow-up question about capital allocation. You've been discussing the current portfolio, developing the ongoing projects at the subsidiary companies. What might trigger a change in that behavior? What would make you more comfortable in terms of the debt service coverage ratio to invest outside your current portfolio?

Thank you, Bruno. Thanks for your question. I mentioned having a coverage level that's closer to 1.5, because that would make us more stable and more organic in terms of indebtedness. An important point I think I should stress is, I’m summarizing, but we have lots to do in our pipeline in terms of portfolio, complex projects, structural projects, and we need to have focus. Discipline in capital allocation, paired with leveraging and focus, is important. Executing on things we can manage properly needs to be our focus; keeping the same level of quality or improving it is key. Focusing on doing a few things well is very important; that’s a soft aspect but a key aspect of being successful. Thanks for your question.

The next question is from Lucas Ferreira from JPMorgan.

Rodrigo, I don't know if you'd be able to share this with us because your portfolio is quite complex. Your coverage ratio has some instability in terms of FX; it's being discussed if the BC is raising the interest rate by 150 bps, and the FX will be net positive regarding paying dividends at your subsidiary companies. But are you considering all that in terms of payables and receivables? How unstable are those variables? And would that be helpful looking forward to get to that 1.5x? My next question is more qualitative. How do you see the business scenario in Brazil and around the world in terms of the economic environment? Is it making the group a bit more cautious or risk-averse? Does that speed up the company's priority to look for potential investments or work on specific leverage or coverage targets that are a bit higher than expected?

Thanks, Lucas. I appreciate your questions. I'll start with the interest rates and sensitivity. Obviously, I'm not going to share guidance on that. However, the potential interest rate increase makes everything more challenging. It makes the scenario more complex. We swap our debt to floating CDI. There are specific things, like the perpetual bonds, where we don't swap the principal. But I'm not discussing the debt level because the spot effects affect the debt level. Regarding interest rates, we do swap significantly looking forward. But yes, you are right. FX going down, coupled with rising interest rates, makes it more challenging. So focusing on good capital allocation and deleveraging also relates to having a lower debt level that lessens the impact of the interest rate cycle. So that’s another perspective you raise. Regarding the business environment and the economy overall, two years ago, money was extremely cheap everywhere in the world. Now, it is a much more challenging environment. Interest rates have risen across the board, especially in Brazil. In the short to midterm, we don't see interest rates returning anywhere close to the rates we had in 2022. We'll need to co-exist with this new environment. You're right; we must be more disciplined. Let's call it disciplined rather than cautious because sometimes, in this kind of environment, you must be more aggressive. But we need to have this discipline since interest rates won't go down. We need to learn how to operate in an environment where capital allocation is key. That’s why we have a solid message on this, and that's what we'll focus on. Thank you for your questions.

The next question is from Pedro Soares, BTG Pactual.

Rodrigo, I have an objective question. We have discussed a potential restructuring of preferred shares connected to Vale's funding. I think you mentioned that this is a possibility. Could you share with us whether it would make sense to consider that option again in terms of timing to speed up the holdco's ability to deleverage by increasing dividends through Compass and Raízen?

Thanks, Pedro. Good morning, and thanks for your question. It's important to stress that any changes to preferred shares can only happen after the fourth year of the structure. So that's not something we can do in the short term. On the other hand, it doesn’t mean that we would be interested in doing so now. The preferred shareholders’ structure is characterized by equity that is serviced by the business dividend flow. When looking at the capital structure as a whole, we want flexibility. We're focusing on lower costs, short-term maturities, but also on flexibility. I mentioned the outstanding bond '27. We have other structures aside from the bond '27 that are outstanding because we need to have that flexibility. If a liquidity event occurs in the company, we need room to accommodate it. This is a combination of things—an ability to deleverage—but we don’t want to be completely tied down without preparing structures. To summarize, the preferred share structure has a very competitive cost in our portfolio. So it’s not on our radar to make any changes in that structure. Thank you for your question.

The next question is from Gustavo Sadka from Bradesco.

My question is about the discount at the holdco level. One of the ways of looking at it is that either the discount is high, or you don't have mark-to-market; they haven't been appraised at Cosan. Piggybacking on the question about the macroeconomic scenario because it's a more challenging scenario, can we consider other mark-to-market options in addition to the private placement, as Compass has done in the past or selling a stake in these businesses? Could that be a mark-to-market option?

Thanks, Gustavo. Thank you for your question. We're always considering options, and those options do exist. There’s nothing in the pipeline right now, but we're always looking into it. Let me just separate what you said about the capital market. We know there's a huge challenge in the Brazilian capital market. It's not the same in the American market; it's much more thriving and functional. But generally speaking, we consider all kinds of opportunities. We don’t dismiss anything. There are no short-term events. Let me make that clear, but it is something we do look into, yes. Thank you for your question.

This concludes the Q&A session. I will now turn it over to the manager for their closing remarks.

Thanks, everyone, for joining us on our earnings release conference call. The IR team is available to answer any remaining questions, and I'll see you in the third quarter earnings release conference call. Thank you, and have a great day.

Cosan's Second Quarter 2024 Financial Information Video Conference is now concluded. For further questions, please contact the Investor Relations department. Thank you for joining us, and have a great day.