Cosan S.A. Q4 FY2024 Earnings Call

Good afternoon everyone. Thank you for waiting and welcome to Cosan's Fourth Quarter 2024 Earnings Release Conference Call with unaudited numbers as well as for the year end. Simultaneous translation will be available during the session by clicking on the interpretation button at the bottom of your screen and choosing your preferred language, Portuguese or English. If you are listening to the conference call in English, you have the option to mute the original audio in Portuguese by clicking on Mute Original Audio. This video conference call is being recorded and will be made available on the company's IR website at cosan.com.br. The presentation is also available for download in English through the chat. During the company's presentation, participants will be in listen-only mode. The question-and-answer session will begin after the presentation. 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 our 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 bear in mind that economic conditions, market conditions, and other operational 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.

Hello, everyone. Good afternoon. We're here to share our results for the fourth quarter and year-end 2024. First, I want to make a note alongside our usual disclaimers. Last night, we filed our press release for Q4 2024 and the year-end results, which are based on unaudited figures. Looking at our entire portfolio, Rumo has disclosed its audited financial statements, as has Compass, and Raizen has had its financial statements reviewed by its auditors. A significant portion of our audit work is already complete, and we do not anticipate any changes to the current numbers we will present. However, due to our independent auditors needing to wrap up the working papers, we have postponed the filing of the audited numbers to March 10. Again, we do not expect any changes in the numbers. Therefore, we chose to proceed with our earnings call as scheduled. Starting with our Portfolio and Liability management, the overall macro environment for 2024 began with positive prospects and an expectation of interest rate reductions in the United States and Brazil, alongside controlled inflation projections and the anticipated appreciation of the Brazilian Real against the U.S. dollar. However, as the year progressed, we saw a deterioration in inflation expectations and a worsening debt trajectory in Brazil, leading to the start of a new cycle of interest rate hikes. This significantly impacted our approach to capital allocation, leading us to reinforce capital discipline and be more proactive with our capital movements. Throughout the year, we made numerous transactions to extend the maturity of our debt portfolio, thereby improving its duration. We have already started 2025 by diligently working to enhance our capital structure, which is why we announced the divestment of our Vale stake at the beginning of January. In 2025, we expect to be very active in improving our capital structure, which will be a key focus for management this year. In terms of portfolio recycling, this has been crucial not only for Cosan but also for the operating companies within our portfolio. All of them are engaging in divestments and strategic acquisitions to navigate this challenging macro environment while continuing to grow and strategically advance relevant parts of their businesses. Transactions are happening across virtually all our companies, emphasizing a high degree of capital discipline and a focus on maintaining or improving portfolio quality despite the macro challenges. Regarding our EBITDA under management, excluding nonrecurring items, we achieved approximately R$30 billion this year, continuing to reflect the strength and resilience of our portfolio. For 2024, excluding nonrecurring events, we reported a negative result of R$900 million, primarily due to our financial results, which were affected by the depreciation of the Brazilian Real and the mark-to-market value of our total return swap involving Cosan shares, reflecting their decline throughout 2024. In terms of dividends and interest on capital received, we saw a significant increase compared to 2023, reaching R$4.3 billion, mainly driven by Compass, which paid more dividends in 2024 than in 2023 due to a previous tax litigation issue. Looking forward, organic returns are expected to align with 2023 levels. Corporate net debt at year-end stood at R$23.4 billion, demonstrating an important evolution in our safety metrics as we recorded significant improvements in our safety culture, despite some unfortunate fatalities in 2024. We remain committed to achieving zero accidents and zero fatalities. Looking at our debt service coverage ratio, we ended 2024 at 1.1, emphasizing the need to enhance our capital structure towards a healthier level, ideally close to or above 1.5 times. In reviewing the performance of our portfolio, Rumo experienced increased transported volumes and tariff growth, achieving record transport levels in several months of 2024. Compass also grew its distributed natural gas volumes and saw positive outcomes from the ramp-up of Edge operations, which operates the regas terminal in Santos. In Moove, we managed to increase revenues despite lower volumes sold by effectively managing supply and operating expenses. Radar showed a lower EBITDA compared to last year due to a reduced portfolio appreciation. Although the portfolio continued to appreciate, the change in value this year was less than last, resulting in lower EBITDA. At Raizen, we faced significant challenges in sugarcane crushing due to adverse weather conditions, leading to lower EBITDA across both the renewable segment and trading business. Finally, our 4% stake in Vale translated to about R$5 billion of equity pickup, though we recorded an impairment on our Vale shares in the fourth quarter to align the investment value with the transaction done in January 2025. Regarding our debt profile, we observed a higher gross debt by the end of 2024 mainly due to a domestic transaction to eliminate 2027 bonds that were callable. The proceeds from the Vale sale will primarily be used to reduce Holdco-level debt. It's important to note that while extending the maturity of our debt, we have also managed to navigate a favorable corporate spread scenario in Brazil, which has allowed us to lower our average borrowing costs. Looking at our cash flows for the fourth quarter, it is noteworthy that the dividends received substantially covered the interest paid and dividends to preferred shareholders, with interest coverage nearing one. Also accounted for are the R$600 million acquisition installments for a Radar telecom company. I want to emphasize that 2025 is poised to be a critical year for execution as we aim to improve our capital structure and maintain disciplined capital allocation, with more transactions expected throughout the year. Thank you for joining our earnings call. Let's move on to the Q&A session. Thank you.

We will now begin the Q&A session with Mr. Marcelo Martins, Mr. Rodrigo Araujo, and Mr. Fernando Tinel. The first question is from Isabella Simonato at Bank of America. Please go ahead, Miss Simonato.

Hi, good afternoon Marcelo, Rodrigo. I have a question about your debt profile. And if you expect to reduce the flow and financial expenses after the repurchases and the liability management that you implemented in Q1 after disposing of the Vale shares. Could you provide some more color on the preferred shares and remind us of the terms and how we need to think about them now after the Vale share disposal? How are you thinking of treating them in your deleveraging process? Thank you.

Thank you for your question. I'll begin with the debt profile. We've shared some of our thoughts on liability management. It's a mix of what's available and callable at low cost, like the recent takeout of the 2027 bond at par. We're focusing on the 2029, 2030, and 2031 for the tender because we can handle larger amounts there. We have related amortization for 2028, which will help reduce the burden in the first half of the year, meaning amortization in 2028 won't be as heavy as it appears. The key point is that the funds are being utilized, noting that these operations often require several working days before becoming significantly contracted. We'll proceed with our current pipeline. It's about managing spaced-out maturities without incurring significant additional costs. Currently, the cost of swap bonds is clearly higher than what's in our portfolio, which is one reason we might consider takeout and potential sales over time. Regarding the preferred shares, they're not directly linked to the Vale acquisition in the sense that we're using the proceeds to manage bond liabilities and debentures. We're using the Vale proceeds to expedite payments for the preferred shares. Their dynamics include service plus dividends from Compass and Raizen. However, these structures do have a cost step-up over time. When we disclose costs, these reflect the average cost associated with the accrued preferred shares. This average cost starts low and increases over time. We're always looking for ways to optimize our structures, though we haven't announced any changes yet as it's not the right time. We're keeping an eye on opportunities and may make adjustments if something compelling arises, but for now, our focus remains on the announced debt calls. Thank you for your question.

Thank you.

The next question is from Gabriel Barra, Citi. Please go ahead, Mr. Barra.

Hi, Marcelo, hi Rodrigo. Thank you for taking my questions. I have a couple, the main one being about capital allocation. The Vale sale, using proceeds from the sale to extend the debt, seems to be looking more comfortable in the short term. I'd like to hear from you about potential divestments. There's been a lot of news regarding potential secondary or primary sales in some of the group's companies. What's your perspective after the Vale process? Are you still considering divestments in light of a more challenging market scenario? If you could provide more details on that, it would be great. My second question is about Moove. There was that unfortunate fire, and you mentioned in the company release about the impact. You're still evaluating the potential effect on the company's operations. Could you elaborate on that and also provide details on the return timeline for that operation? What kind of impact will it have on the company and Moove's operations in Brazil? Any insights would be helpful. Those are my two questions. Thank you.

Thank you for your questions. Yes, there are a couple of key points here. I'll start with your second question about the need for any further action. Yes, we do see the necessity for additional steps. The Vale process was significant and timely, allowing us to be in a better position for capital allocation in 2025. However, it hasn't reduced our urgency. Our service coverage ratio is close to 1, which is not something we view as comfortable. We need to address other areas, and it's important to emphasize that all options remain available. We have certain assets in our portfolio that we are less inclined to look at due to our control over them or their potential as future growth platforms. However, we are exploring options with urgency. Regarding the challenging market conditions you mentioned, I believe there’s a positive outcome from the Vale process. We approached the Vale disposal pragmatically, which has generated significant interest from other investors in our portfolio. Our assets are resilient and have a long-term outlook, making them appealing even in challenging macroeconomic conditions. However, we adhere to two critical principles: we do not want to compromise on the quality of our portfolio, which is essential, and we recognize the value of these assets. When we move forward, it will be at the right price. Would you like to add anything, Marcelo?

Yes. You talked about the main points. Preserving the portfolio quality is key because we see an interesting future for Cosan after we deleverage. Our main priority right now is to reduce Cosan's leveraging as much as possible. Obviously, not losing sight of maintaining a high-quality portfolio. We won't sell assets that are strategic for the company's future, and we'll bring an imbalance to the portfolio's quality. We've been reiterating that, and that's the key point. We do have interesting options that can be executed in a timely fashion. We're running against time because the cost of that debt carryover is not compatible with the quality of the company's financial health. We have stressed those points a few times. I just want to reiterate that, that is our utmost priority right now. The discipline to adjust the company's capital allocation, both at Cosan and Raizen, those are the two companies that need to look at that urgently. We are sharing with you what we are going to do. And right now, we are putting that in place. I don't think we need to be repetitive. The market should now look at the fact that we are seeking to reduce that and maintain quality in our portfolio. Let's not forget that there is a clear limitation which is the dividends we will take from the operations. We're not going to reduce our debt at Cosan by selling assets that will decrease the quality of the portfolio because that will limit the growth of the controlled companies. We want to have something continuous that will bring the right returns in the future. There's a lot of speculations around that topic, and I want to make it clear. We need to adapt to the limitation of the dividends that are possible within our system so that we can continue to grow the controlled companies. It's not the companies that need to adapt to our need to keep the debt profile. As to your second question about Moove bar, let me start by the main one. There have been no fatalities and no one got hurt, I just want to make that very clear. The operation and the speed with which the company has reacted was extremely successful in a very challenging scenario. Our interactions with stakeholders have been constructive. There have been no environmental impact. The company is very close to commercial stakeholders, government stakeholders, the communities. We've been very constructive and we've had a very solid interaction with all of them. The company has been able to be highly effective in contingency plans. You will have noticed that, obviously, part of the plant was affected the storage infrastructure, however, was not affected at all. The company was able to keep the fire under control and part of the plan. Another point is the company has done a couple of things over time. One of them was to increase its capacity. We had announced recently that we were going to acquire a Greece plant at the beginning of the year, and that gives the company operating flexibility, which is key right now. And another important thing the company has done over the year has to do with what you mentioned, which is risk management through insurance. We have policies for environmental damage, civil liabilities and operating risks. So we had done our homework. The company had done our homework through the right kinds of insurance, which is going to be important now. Even if we haven't disclosed financial information and it's too soon for that, we will update you as soon as we have more precise information available, but it's important to say that in addition to the partnership with ExxonMobil and other commercial partners, the company already has a plan in place to capture volumes alternatively for a reasonable part of the plant volume. Obviously, we're not ready to disclose the guidance on impact, but we do have the insurance, and we were able to implement everything in a timely fashion, and that will be crucial to preserve the company's financial health. It's also important to point out the relevance of our international operations. We have been expanding internationally and nothing has changed when it comes to our assets in the U.S. or Europe. The company already had an agenda to create value, especially with PetroChoice, our most recent acquisition. But the company's international acquisitions will carry on and top management's focus will continue to be on delivering the same level of results across geographies. So that's what we can share with you, Laura, given that it's all very recent, but we will update you as time goes by. Thank you for your questions.

Very clear, Rodrigo. Thank you Marcelo.

Thank you. The next question is from Thiago Duarte from BTG Pactual. Please go ahead Mr. Duarte.

Hi, good afternoon, Marcelo and Rodrigo. It's a pleasure to speak with you. I have a question that might be the toughest one to address. Following the changes announced at the end of last year at the Holdco level and some subsidiaries, particularly Raizen, it's evident that there's been a shift in your approach, with a new focus on deleveraging. It seems you're facing a positive challenge with numerous options available to you. You've tackled the Vale situation and addressed the debt's duration and cost. However, considering the size of your portfolio and the scale of the companies involved, we’re curious about the direction the company plans to take in terms of deleveraging, which is currently your main priority. Now that a few months have passed and you've been in discussions with the market, could you share some insights? Given your desire to maintain portfolio quality and avoid detrimental moves, as Marcelo mentioned, what direction do you see the company taking? Are you looking at increasing capital at the Holdco level, boosting capital at subsidiaries, selling part of the stakes in subsidiaries, or offloading subsidiaries entirely? It’s challenging to predict your path since there are several options available, which is a fortunate position to be in. Any insights you could provide would be appreciated. Thank you.

Thanks, Thiago, for your questions. Well, as you know, we're very cautious about anything the company might do due to confidentiality, and it's also strategic for the company. So let me share something more conceptual and not exactly what we're going to do. In some cases, which you're familiar with, for instance, San Luis port, we're selling 100% of that. That's a full sale of the assets, and you all know that. It's an ongoing process as we speak. So that's the first point. The second point is increased in capital is not being discussed right now. That's not the main choice. But as I said, it's not off the table, but it's not the main avenue we're considering. As I said earlier, and in answering Barra's question, we have excess control of some assets, so to speak. So partial monetization could take place there with the right partner for the right price at the right time. And what I would add to your question and to give you some more color on what's to come, I would say that — there will be a change in our model, and Marcelo talked a lot about that when he talked about leveraging. But I think it's important to reiterate it. The leveraging model at the Holdco level for new verticals is not a model we will be pursuing looking forward. In the future, we'll be promoting the growth agenda in the invested companies for many regions because of the debt indebtedness of the Holdco is more inefficient financially. Often, we can't get as compelling funding as the subsidiaries, they can get financial funding or for the structure. The fact that many of these invested companies, and I showed you some of that in my presentation, can enter into partnerships with strategic partners, commercial partners and bring in more creative funding that don't involve a stake at the level of the Holdco, but further down the fact that we don't control 100% of the business dividends when you have a relevant CapEx agenda. So that's another point. As Marcelo said getting in the way of business growth to provide dividends to the Holdco is not the best model looking forward. So I'm not giving an objective answer in terms of which assets, but those would be the points I'd share with you.

Thiago, let me just jump in. There's an order of events. First and most importantly, we needed to change strategy. And to be clear on what the next strategic steps are both at Cosan and Raizen. I can speak for both because there's a similar situation in terms of the direction of the strategy. So that's the first point. And I think that's clear. Cosan will have absolute discipline in its portfolio. A change and focus in terms of growing the portfolio, not for the portfolio, but through the invested company. So a gradual but constant reduction and desirable until we get to 0 at some point in terms of Cosan debt. It's an operating company, we need to decrease leverage at Raizen, but it will keep a healthy leverage level. Cosan has an asset pool that could be sold, but the priority is what we consider to be more or less strategic, and we will respect that. But that's a clear step before considering any kind of capitalization, whether it be at Raisin or Cosan. We need to have a concrete effort to sell assets that are less relevant and that do not get in the way of the strategic rebalancing of the company. Now that said, and I'll reiterate it, Cosan will not be putting money into Raizen. The clear priority is to reduce its own leveraging. I am committed to our creditors and to the market that Cosan's focus will be on deleveraging. Raizen can sell very relevant assets that could have a high positive impact on it, leveraging. And after assessing that reduction, there may be a need to capitalize. That will be considered at the right time. So I think both shareholders are well aware of that. It's been the object of ongoing discussions. Regardless of we need to go over what needs to be done before we get to that point. So we're not ignoring the fact that capitalization is needed, but that's the second step because at the current price, no one wants to be diluted because the price situation is completely uncomfortable with the quality of the assets, despite the challenging scenario that require some kind of discount. We have been penalized to consider the quality of our portfolio, the level of return of our business considering the competition. However, the price is being paid considering the macro scenario, which affects us, and our objective is to change the situation, so the market can assess our company's adequately, those that are listed and those that are not listed, but have an implied price in our shares.

Excellent. If I could go back to Rodrigo's point. And obviously, I knew you couldn't be too granular in our answer. But the best way of thinking about it Rodrigo right now, taking your net debt and your managerial debt that you've recorded that you have reported, we're talking about R$14 billion, considering Vale's R$9 billion and another R$1.5 billion from the preferred ones. Let's treat as that. What kind of level, one way of thinking that would be the DSCR, the debt service coverage ratio? Obviously, you want that to increase. But in terms of reducing the debt immediately because I don't think you're going to get to the Holdco's debt level to 0, that's a longer-term thing. But right now, is there a number that you could share with us? Out of those R$14 billion plus the preferred shares?

Thiago, I would like to reduce that as much as possible. I know we can't reduce the debt, and it wouldn't be realistic to assume we're going to bring it down to 0 in the short or the midterm. We're going to need time to do that. But I think it is possible to commit to reduce it, I'd say, by at least 30% in the coming months. That is our objective. We have an asset pool that will allow us to get to that. We have a set of priorities. We'll start focusing on those. We know where we're going to go to get to where we want to get to. In terms of execution, we're starting off with assets that make more sense, considering the valuation for the time of those assets and liquidity. If we can't do it that way, then we'll go another way. But I couldn't tell you what we're going to prioritize because we're trying a strategy that may or may not work. We're very optimistic with what we're seeing right now, but we don't have anything concrete that we can share with you for the time being.

Thank you. The next question is from Victor Modanese from UBS. Please go ahead.

Good morning, good afternoon. I have one question about how you're seeing the share in the land business. In your opinion, does the current portfolio continue to make sense considering the macro scenario are the better options to monetize on those assets in the short term? First is selling land, considering your current leveraging. Thank you.

Thanks, Victor, for your question. Well, it’s along the same lines of what we said previously. We're looking at different alternatives. Obviously, there are also different ways of divesting that is already happening in our land business, especially last year and this year won't be any different, I don't think. We have been increasing our divestment at the invested company level to capture this considerable appreciation of this height cycle that we're facing that may not be as visible externally because as we sell it and the portfolio appraisal appreciate then you see a higher number than you saw in the previous year. But last year and this year tend to be the highest divestment years at Radar. So it's important to say that, that is already happening at the invested company level. But obviously, anything more structural is on the table. As I said, we're looking at different alternatives. Thank you.

The next question is from Regis Cardoso from XP. Please go ahead.

Good afternoon, Marcelo and Rodrigo. Thank you for taking my questions. I have a couple. First, I want to ask about the capital structure. What is the relevant metric you're considering? I know that debt service coverage is one of them, but I typically look at the proportion of debt relative to total assets. How does debt account for the asset enterprise value in the market? Do you find that ratio useful? If not, could you share what a regional target might be for the debt service coverage ratio or the share of debt within the enterprise value? I understand that your long-term goal is to bring that close to zero, but what would be a healthy level that could alleviate any urgency at the holding company level? My second question is about equity. What do you anticipate needing to inject? From your prior response, it seems you are considering exhausting potential divestments. Please correct me if I'm mistaken. Following that, would your next step be determining the actual need for any capital injection? If you are contemplating injecting capital, what type of control are you envisioning, particularly regarding Raizen? Do you think it might be feasible to separate some assets related to E2G or renewables that could hold higher value for specific buyers, perhaps by selling part of it or capitalizing in another way? In general terms, what are your thoughts on capitalization? Thank you.

Thank you, Regis, for your questions. I'll begin with the first one about the capital structure. There are a couple of important points: first, regarding the IV and the pie chart, we are not satisfied with the current split, which is why we are focusing on reducing our debt. We are optimistic about the potential value that could shift to equity based on the underlying portfolio. However, we currently do not have a specific metric for that. We aim to achieve a service coverage ratio of 1.5 times. Given our level of debt, any actions we take will lead to a clear transfer of value from debt to equity, which will effectively reprice the company. This is why we don’t have a specific metric, as there is a discount incorporated into the holding company due to the amount of leverage. Regarding your second question, specifically about Raizen, I would like to recap what has transpired and what lies ahead. There was a significant management change in November that initiated a clear turnaround strategy, which includes simplifying operations, optimizing capital expenditures, and divesting to enhance the company’s performance. We are pleased with the progress made in such a short period. As Marcelo mentioned, this is a critical step, and as you pointed out, nothing can proceed without this change. In terms of relationships with partners, we are exploring opportunities for new partnerships. However, these would need to be approved by our existing partners, particularly for businesses like electricity or renewables. While we are considering potential partners, there are no active discussions at this time. Additionally, concerning injecting capital at the company level, as Marcelo emphasized, it’s essential to reiterate that due to our current debt levels, Cosan is very clear about being open to dilution. The company does not have any capital available for allocation, which I think is implicit. Marcelo, do you want to add anything?

No, I think you've mentioned everything. I'd just say that specifically about splitting risen assets that will depend on an agreement among the main partners, Nos and Shell, but both are aware that if there is a possibility to invest in a business that has more feasibility than another, we'll consider that. So if we have to split the businesses, it will be considered. And another important point is that there is a clear need to review our plant portfolio. We are doing that right now. And there is also the possibility to, at some point, reduce that portfolio. We haven't talked a lot about that, but it's important to make it clear. We are reviewing our portfolio and specifically the plants in our portfolio. I couldn't tell you how much we're going to reduce it by, but we will be reassessing our asset base there as well.

Great. That was very clear Marcelo and Rodrigo.

Thank you. The next question is from Deborah Borges from Safra. Please go ahead with your question.

Hi everyone. Good afternoon, Marcelo, Rodrigo. I have a couple of questions. The first one is about the preferred shares until there was a percentage.

Sorry, we can't really hear you, Deborah. Could you speak a bit louder or closer to the mic because we can hardly hear you?

Is that any better?

Yes. Okay.

I have a couple of questions. The first one is about the preferred shares until. There was a percentage of dividends payout, both at Compass and Raizen. We know what to expect for the next year's Raizen. But looking forward, until 2032, should we expect the same dividend you paid out from 2023 to 2025. And I want to make it clear, in 2032, what will happen? Well, Cosan, does it have to rebuy those preferred shares? And what would be the options? That's my first question. Second one is you entered 2024 with a coal spread at value of 1.43 million. So did you undo that call spread when you dispose of Vale? Or did you keep it?

Thank you, Deborah, for your questions. I'll start with the first one. About the preferred shares. No. Cosan does not have to rebuy them. But that possibility does exist. Meanwhile, there was a question about that earlier. They do have a cost step-up over time. The dividends are not required. So the model is a percentage of the dividends paid out by the business. As for the dividend flow expectation, we don't provide a guidance on future flows, but they will always be a percentage of the dividends that are paid out, whatever they are. They vary over the contract and the correction index also changes. So those are the variables that we monitor. As for the coal spread, we still have it, but the intention is to divest. It's for a matter of timing than anything else. It's much more about the financial timing. Thank you for your questions.

That’s great. Thank you.

The Q&A session is now concluded. I will now turn it over to Mr. Marcelo Martins for his closing remarks.

Thank you so much for joining us. I think we've covered all the relevant topics for the company right now. I just want to reiterate once again that Cosan is completely focused and committed to improving the quality of our portfolio looking forward. So considering high-quality assets and less priority assets is our utmost priority right now. And what we're going to do to get there is to have a leveraging level that will allow us to sustain this portfolio without having to drain the companies or making them pay out more dividends than they can, and therefore, compromising their growth over time. That is another key condition. So once again, Cosan will adapt and will reduce its leveraging level so that the dividends payout, which might increase given the quality of the assets and additional cash generation, but it will have to happen in time. So our capital structure will respect that timing. And there's a huge effort here by everyone at Cosan to reduce our leveraging level intelligently as quickly as possible. We know that the macro scenario is not looking very optimistic at the moment. So we have to do what it takes. Thank you for joining us, and see you soon.

The unaudited information Cosan's fourth quarter 2024 video conference is now concluded. The IR department is available to answer any further questions. Thank you so much for joining us, and have a great day.