Cosan S.A. Q1 FY2025 Earnings Call

Good morning, everyone, and thank you for waiting. Welcome to Cosan's First Quarter 2025 Earnings Release Conference Call. The video conference is being recorded and will be available on the company's IR website at cosan.com.br. During the company's presentation, participants will be in a listen-only mode. The question-and-answer session will begin once the presentation is concluded. 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 circumstances, 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.

Hello, everyone. Thank you for joining our earnings call for the first quarter of 2025. Let's start with the quarter highlights. We managed around R$5 billion of EBITDA this quarter, which is the first quarter without the Vale stake included, as we divested it earlier this year. Unfortunately, we recorded a net loss of R$1.8 billion. This quarter also saw a significant decrease in our net debt, mainly due to the Vale divestment, ending the quarter with R$17.5 billion of net debt. We received substantial dividends from Compass, as part of a capital reduction, highlighting our ability to generate strong cash flow while rewarding our shareholders. Our interest coverage ratio stood at 1.2 times this quarter, positively influenced by Compass's distribution. We remain committed to safety and are focused on achieving zero accidents in our operations, despite some tragedies this quarter. Looking at our operational performance, Rumo faced lower volumes due to delays in the crop season. We remain optimistic about meeting our guidance for the year, especially as we expect a stronger second half. Rumo's average tariff increased, which supports our belief in railway competitiveness for grain exports in Brazil. Compass experienced an uptick in natural gas volumes, aided by the acquisition of Compagas, and improved margins from a better mix in residential sales, particularly in São Paulo. Our strategy with Edge continues to show promise, leveraging the non-regulated gas market and optimizing LNG cargoes. In Moove, we dealt with challenges from a fire at our Ilha do Governador complex, which significantly affected our results this quarter as we work to restore operations. Radar reported an increase in EBITDA from lease agreements and land sales, successfully selling above appraisal value. Raízen struggled this quarter with lower sugar volumes, impacting overall results. We actively managed our liabilities, raising about R$11.5 billion, primarily from the Vale divestment and debentures issued in Brazil. We used these proceeds to pay off outstanding bonds and redeem portions of other debentures, enhancing our debt profile while reducing costs. We ended the quarter with R$21.7 billion of gross debt and R$17.5 billion of net debt, maintaining good liquidity in a volatile market. Our interest coverage was slightly improved at 1.2 times, affected by the dividends from Compass. Our amortization schedule has no payments until 2028, and we achieved a longer average duration and reduced average cost of debt. On the cash flow front, our notable figures include proceeds from the Vale divestment and additional debentures, primarily directed toward debt repayment and partial redemption of preferred shares in Cosan Nove, part of our capital structure strategy. Thank you again for joining us. Let's move on to the Q&A session.

We will begin our Q&A session with Mr. Marcelo Martins; Mr. Rodrigo Araujo; and Mr. Fernando Tinel. Our first question is from Gabriel Barra from Citibank. We will now unmute your microphone. Please go ahead, Mr. Barra.

Hello? Thank you for taking my questions. Hi, Marcelo. Hi, Rodrigo. Hi, Tinel. I have a couple of questions, please. The first one is about the capital structure and short-term divestments. Obviously, that is the main topic at the company that migration of the debt value to equity. And maybe considering lower interest rates, maybe there are a lot of questions about that. So, could you give us an update on the divestment process? And what we can expect in the short term? What are the main elements we should be looking at this year? Second question, since Moove is one of the few companies that don't hold a conference call, I think it would be interesting to discuss their thesis. It's been a tougher quarter, as Rodrigo said, because of the fire. Could you talk about your strategy for Moove, first? As far as I understand it, and this is something to be discussed, what should we be looking at? And what should be your priorities now that the plant is being rebuilt? Is it market share, or is it margins? There's a supply issue that you need to address. So, what kind of a timeline are we talking about to solve that problem? So, if you could give us a bit more color on Moove, that would be great. Thank you.

Good morning, Barra, and thanks for your questions. I’ll begin by addressing your second question about Moove, and then we can discuss the capital structure. Following the fire, the company has responded swiftly, and it has been impressive how quickly it identified alternatives. You are correct that the focus has shifted more towards volumes rather than margins. The supply chain may not look the same moving forward, as it is now largely about meeting client needs. The company has mapped its capacity and is operating at full efficiency in terms of alternatives. It is actively implementing necessary measures, such as obtaining client certifications and establishing plants, in line with its plans for risk management, which includes reducing some operations at the Rio de Janeiro plant. We acquired a facility in Greece, and we had intended to shift operations from Rio de Janeiro, which may now happen more swiftly. This quarter has shown improvement, with April performing better than March, indicating a recovery in results. In terms of insurance, the company has a strategy in place, and while discussions around insurance are ongoing, they are complex and take time. Regarding our future strategy, there will be minimal changes, as the company has been concentrating on international expansion. However, the current focus has shifted back to addressing immediate needs, resulting in a slight delay in our rollout plans. In terms of the Rio plant, we are learning and adapting, and by the end of this process, the setup will differ significantly concerning fire prevention. Production that can shift elsewhere will do so, while the Rio de Janeiro plant will concentrate on large-scale products. Specialty or smaller production will likely move to other facilities. We haven’t commenced a reconstruction process because we are still assessing what will be moved from Moove’s facilities. Now, addressing your first question regarding the capital structure, we have various alternatives under consideration, although there isn’t anything concrete to announce at this moment. The urgency hasn’t changed, and we clearly recognize the importance of divestments, including the Vale divestment, as part of our strategy. We need to secure funding, and there are several ways to achieve this. It is a lengthy process, and we are committed to ensuring that we do not end up with a weaker portfolio by being cautious in our approach. We have multiple plans to improve our capital structure while reducing leverage without compromising our portfolio’s quality. This is a challenging balance, but we are practical enough to recognize both successful and unsuccessful initiatives, and we have backup alternatives ready.

To add to what Rodrigo mentioned, we are entirely focused on adjusting Cosan's capital structure while also closely monitoring the divestment initiatives at Raízen. We are proactively seeking solutions that extend beyond just divestment, which remains a key priority for us. Currently, we have several ongoing initiatives and advanced discussions underway to make progress. Although I won't provide specifics to avoid speculation about ongoing work, I can assure you that we have made significant strides since our sale of Vale. We have strong alternatives for execution, and we are optimistic about addressing these matters promptly. Our strategy is clear: we need to improve Cosan's capital structure as well as adjust Raízen's capital structure to maintain a well-balanced portfolio. Some may wonder if we are contemplating selling a significant stake in Compass or Rumo, but the answer is no; that wouldn't be the right path for us. We are exploring other options that extend beyond this particular choice. I want to emphasize that we are actively implementing our plans. Thank you, Barra.

Thank you, Marcelo. Thank you, Rodrigo. That was very clear.

The next question is from Isabella Simonato from Bank of America. We will now unmute your mic. Please go ahead, Ms. Simonato.

Good morning, Rodrigo and Marcelo. Thank you for the opportunity to ask questions. I have a couple of inquiries. First, Marcelo, your strategy and focus are quite evident. You mentioned Raízen and that you are closely monitoring the situation there. I’d like to hear more about how you view the company's recent performance and the operating outlook for fiscal year '26, especially considering the challenges in the sector. As shareholders, what is your perspective on Raízen's progress? Also, Rodrigo, regarding liability management, you mentioned your active efforts in changing the debt profile. Should we expect this trend to continue? Additionally, what can we anticipate regarding the remaining preferred shares? Thank you.

Hi, Isa. Thanks for your question. Regarding Raízen, the positive aspect is the awareness and practical actions being taken to implement necessary changes quickly. They are realistic about the challenges in this sector. There was a shareholders' meeting with Shell in London this week, and both we and Shell see that once the capital structure rebalancing is completed, the company will have excellent prospects. It is clear they will concentrate on their core business with high efficiency and a focus on returns. We need to consider significant divestments, which will include energy, resulting in a reduction of our crushing capacity and the number of plants in our portfolio. There's considerable interest in this, and we are not talking about a blanket approach to sell all assets. However, we remain optimistic about the volume of divestments and the positive impact on the company’s deleveraging. This won't be the only solution, as we are exploring other options, though I cannot provide specifics since it's still a work in progress. Raízen has indicated that all options remain viable. On behalf of myself and Shell, I can say we remain pragmatic and focused, planning divestments in energy assets as well as the distribution business. Shareholders will need to focus on our responsibilities rather than the capital structure of Raízen itself.

Isa, to your second question, in terms of what we needed to do and using the proceeds from our divestment at Vale, we've done quite a lot. You saw that in the first quarter, obviously. Right now, there's more uncertainty and there are divestment alternatives and other options in the capital structure. So, we'll carry more liquidity. But in terms of changing the debt profile, we'll always be looking at opportunities to access the market and to improve the structure. We're very cost-sensitive. I'm sure you saw that we've been able to extend the duration and there have been some positive windows at the end of last year. There was a great spread window in the Brazilian market. And this goes for Cosan. We are not just sitting and waiting. The company is very sensitive when it comes to numbers, but we're not counting on that. And about the preferred shares, it's something we are continuously monitoring. There are variabilities, whether it's going to pay out dividends or not, there is a differentiation in terms of fiscal losses. So, we're monitoring the efficiency of the structure the whole time, and obviously, we can address that at any time depending on the variability and fiscal issues. In terms of cost priority, it's not the first alternative, but we are looking at it. Thank you for the question.

Thank you.

Thanks.

The next question is from Matheus. Please go ahead, Matheus.

Thank you. Good morning, Marcelo, Rodrigo, Tinel. Thanks for all the clear answers so far. My first question is about the interest coverage ratio and its impact. What I have been seeing as a consensus, and according to our math, obviously, we could be wrong, but it sounds to me like in the second quarter, Cosan will be very close or below 1 time in terms of interest coverage ratio given the concentration of dividends we had in the last quarter. And maybe, this ratio will only improve in '26 rather than in '25. My question has to do with Barra's question in terms of sense of urgency. Will that trigger any covenants? Are you discussing anything like that? Is there a sense of urgency in the second quarter? So, that's my first question. Will that be a trigger for the company? And the second question is also along the same lines, but about the cash need and the structure of the preferred shares. Compass' capital structure is clear. But considering the 25% of the Compass' dividends being paid out to preferred shareholders looking forward, and at Cosan Nove, if I got it right, there was a dividend payout of the preferred shares, but it wasn't followed up by a dividend paid out to the holding company. So, what about the cash needs at the HoldCo level? Will you have to add some money to the structure to pay out dividends to the preferred shareholders and the lack of visibility in terms of Raízen's dividends in the short-term? So those are my two questions. Thank you.

Thanks for your question, Matheus. I'll begin with the interest coverage ratio. It won't trigger any covenants; it relates to establishing a healthier capital structure for the company. You're correct that organically, the coverage ratio is likely to decline. As I mentioned, additional dividends will only be issued in the first quarter. Therefore, it will decrease over time, highlighting our need to reduce net debt. That's why we're exploring options to achieve that. The urgency comes from the desire to create a more balanced structure rather than from covenants related to liquidity. Regarding your second question about preferred shares, these are two separate issues. Given the structured model, preferred shareholders will have a priority, but paying those dividends is not mandatory. If dividends are not paid over time and the fiscal aspects change, we must ensure that the structure remains more cost-effective compared to other capital structures within the company, depending on the company's future payment levels. While preferred shareholders do have priority, what happens in the future will hinge on the company's decisions. That's the context. Thank you for your question.

Thank you.

The next question is from Guilherme Martins from Goldman Sachs. We will now unmute your mic so you can ask your question. Please go ahead, Mr. Martins.

Thank you. Hi, Marcelo. Hi, Rodrigo. Hi, Tinel. Good morning, and thank you for taking my question. It's a follow-up to Matheus' question. Obviously, the company is going to have to divest more to get to a healthier situation or closer to the 5.2 times, as you said, which will be healthier. So, if there are no more divestments as of now, what would be a potential DSR in terms of interest coverage ratio by the end of the year?

Thank you for the question, Guilherme. We haven't disclosed the guidance on that, but as I said, it should drop along the year. It should be lower than that. It also depends on the performance of the companies in the portfolio. Obviously, we'll be working throughout the year to see how that's going to pan out. But you're right, so it's an important chapter, and we're definitely working to make sure that we execute on something this year. We're not working with a scenario where we will not be executing on that this year. Thank you for your question.

Thanks, Rodrigo.

The next question is from Lucas Ferreira from JPMorgan. Please go ahead, Lucas.

Good morning. I have a couple of follow-up questions about what you've discussed earlier. Rodrigo, could you talk about Moove? What are you expecting in terms of CapEx for the next one to two years, considering the fire, you mentioned looking for alternatives to Ilha do Governador? And I have another question about Cosan Nove. Is there a clause? What might happen if there's a capital increase at Raízen? Will that trigger any advances? What might happen to Cosan Nove if there's a different structure at Raízen or a capital increase or anything that might happen in the future?

Thank you, Lucas, for the question. Well, about Moove and CapEx, right now, we don't have a CapEx estimate because, as I said, we're working on things that will be migrated in the company's facilities. Given the current scenario, we are using a mix of companies' facilities. They are third-party facilities, but apart from that, we don't have a CapEx estimate for the time being. We have considered something marginal, especially in terms of adjustments and setups, but we don't have an estimate. As I said, the company has insurance, has its own insurance. So, the expectation for the CapEx, whatever it might be for the plant, a large part of it will be covered by the insurance. To your second point about Cosan Nove, there is no specific clause, but obviously, a lot will depend on what happens to the structure. There will have to be a renegotiation because Cosan Nove structure may not make sense anymore, it might be impacted. There's nothing happening at the moment, but depending on the company's capital structure, there may be a need for a reduction, but nothing major. And the partial redemption that took place this year is something relatively simple to do. So, it shouldn't lead to an impact of a discussion at Raízen. Thank you.

Thanks.

The next question is from Regis Cardoso from XP. We'll now unmute your mic so you can ask your question. Please go ahead, Mr. Cardoso.

Good morning, Marcelo, Rodrigo, and Tinel. And thank you for taking my questions. A couple of follow-up questions about the capital structure. Rodrigo mentioned that you'll have to reduce the absolute debt level. So, what are we talking about at the end of the day? Are you planning on bringing the HoldCo debt level to zero and considering that the preferred debt might not have the same fiscal effect as the tax shield? What would be your target? Is it R$10 billion, R$0, R$15 billion? In terms of the preferred shares, Rodrigo talked about variable rates. What kind of variability are we talking about? And is there a tax efficiency effect when the redemption value is over the initial value? Is that something we should be monitoring? And if you'll allow me a third follow-up question, please? Do you have any idea about Moove's timeline? Can it be measured in weeks, months, or years, just so we know what to expect? Thank you.

Thanks for the questions. As for Moove's timeline, not for the reconstruction CapEx, but by the end of this year, we expect to be in a much better position, not only in terms of production capacity, but in terms of a clear strategy and executing on the CapEx. There's also the insurance, as I mentioned. So, I don't see that as a risk. I was talking about the rate step-up. So, there are points in time when there are rate step-ups and the current cost level. That begins to not be competitive. I'm talking not just about Cosan Nove, but Cosan Dez. At the average cost we have right now, it will be more expensive than the average cost. So, it will be less compelling. To your point about the results and the balance that is over the original amount, the important point is, it has a lot more to do with the company results and the dividend itself, so the destination going to the preferred shareholders has to do with the net income. I mean the fact that it's over the original value isn't a risk to the company. And about the capital structure, we did mention that in the last call, we're aiming to execute that in the next month or two for the short term. We should have a healthier structure. And in the long term, it should be zero. I don't want to exaggerate, but that's the midterm, R$1.5 billion is what we're looking at. We'll be in a better position and we'll allow us to navigate that challenging scenario where they are higher interest rates. Thanks for the question.

Let me just jump in. Our goal for Cosan, the HoldCo, is to have structural debt levels as close to zero as possible. While reaching zero may be uncertain, we should not rely on the HoldCo's dependence on a growing dividend cycle from the operating companies. We need to give these companies the freedom to grow and implement their strategies. Our focus has already been and will continue to be through the controlled company. We aim to avoid establishing any new lines of business or making substantial acquisitions through Cosan. This approach will help us maintain low structural debt levels, allowing us to manage our portfolio efficiently.

Thank you, Marcelo. Thank you, Rodrigo.

The next question is from Gustavo Sadka from Bradesco BBI. We'll now unmute your mic so that you can ask your question. Please go ahead, Mr. Sadka.

Thank you. Hi, Marcelo. Hi, Rodrigo. Hi, Tinel. You've addressed most questions. I have a question about Radar. Right now, given the current interest rates, considering a CDI investment, it looks like it's more favorable to sell and given the company's leverage, will you be ramping up land sales? And what can we expect in terms of those sales? Thank you.

Hi, Gustavo, thank you for the question. Yes, that's already happening in practice. To your point, about the target, we don't have a set target for that, but in addition to the yield, we have been selling this land above our portfolio appraisal. In the last few years, we've captured significant value, especially the bumper crop. And you're right, we're below the SP, but that's been happening for a while without guidance for that. Thank you for the question.

Thank you, Rodrigo.

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

In my closing remarks, I'd like to focus on Raízen, please. I think we have made great progress in the last few months. We're very, very happy with the measures that have been implemented by the new management, by their focus and a very clear view about the future of the company, as well as the divestment plan that is being put in place right now. We do have a very feasible plan. And it's the right size to be able to adjust the capital structure. We are highly confident on the company's ability to deliver excellent results and to focus completely on the company's core business. And I'm speaking for myself, and I am also speaking for Shell. Even though this has been a very tough quarter, I think, once again, it does show how serious and how engaged the company's management are to take the necessary measures to make the necessary adjustments and to communicate that clearly to the market. And our role, everything that goes beyond the company's divestment plan. It's very clear to us and to Shell, we're working very closely with them. We are in agreement with what we need to make in terms of adjustments to our capital structure, and we're working together and highly focused on that. So, thank you all for joining us on this call, and we'll see you soon.

Cosan's first quarter 2025 earnings release video conference is now concluded. For further questions, please contact the Investor Relations department. Thank you so much for joining us, and have a great afternoon.