Cosan S.A. Q2 FY2025 Earnings Call

Good morning, everyone, and thank you for waiting. Welcome to Cosan's Second Quarter 2025 Earnings Release Conference Call. The conference call is being recorded and will be available on the company's IR website at cosan.com.br. 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. Welcome to our earnings call for the second quarter of 2025. We start with our usual disclaimers about future projections and future operations of the company. So starting with the highlights of the second quarter of 2025, we start with our EBITDA under management of roughly BRL 6 billion this quarter, slightly below last year, and we're going to talk a little bit about the details of each one of the portfolio companies following during the call. We had a negative net income of about BRL 1 billion in the quarter. We also had our net debt stable when we compare to the first quarter of 2025. Our debt service coverage ratio is also stable compared to the quarter, mostly coming from dividends that we received from Rumo and Radar that accounted for roughly BRL 600 million in this quarter. And also in terms of our safety metric, we also had an important improvement in this quarter when compared to the first quarter. We unfortunately had a fatality in the quarter, but we continue to have safety as a strong value of the company and continue to disclose important operational and safety results throughout the portfolio. So talking about the operating performance of the different businesses. In Rumo, we had higher transported volumes, basically translated into a higher EBITDA. We also had an increase in terms of market share in the Port of Santos. That was the result of a change in the tariff dynamics. So we had lower tariffs compared to last year, but that translated also into higher volumes transported. In Compass, we continued to see the growth of the portfolio and mostly we had an important impact, not only in volumes but also in terms of the mix. So we had higher sales in the residential segment that also brings higher margins. We also had an important increase in the volume traded by Edge. So we continued to ramp up the terminal in the Port of Santos and to ramp up the strategy of being a relevant player in the unregulated gas market in Brazil. The lower EBITDA compared to last year is mostly because of nonrecurring events that happened in 2024. So basically, on a recurring basis, we had better results. In Moove, we had the reduction in the volumes sold, mostly given the fire that happened in February this year. We continue our recovery trajectory. And in this quarter, we also started accounting for the impacts of the insurance related to the event that happened in February this year. In Radar, we had the sale of a farm in the second quarter of '25, and we had stable EBITDA compared to '24. So we continue as we've been mentioning to divest partially from the land in the portfolio, and we also continue to have a relevant BRL 17 billion portfolio, even though some divestitures have been going on. And in Raizen, we had a positive result in the fuel distribution segment, with better margins, healthier margins and higher volumes as well. But we had the negative impact of the delay in the sugarcane crushing given the weather and the fire that happened in the previous harvest. So those impacted negatively the EBITDA of Raizen this quarter. In terms of liability management, there was no relevant event in this quarter. I, as I mentioned, have the gross and net debt stable compared to last quarter. Our debt service coverage ratio is also stable compared to last quarter. And we have a slight decrease in the average cost of our debt, from CDI plus 90 bps to CDI plus 88, and an average duration of 6.2 years. Finally, in terms of our cash movements for the quarter, as I've mentioned, we had dividends paid from Radar and from Rumo this quarter, that was the most relevant event in the quarter. We had the interest payments also consuming part of the cash in this quarter. So those were the main highlights for the second quarter of 2025. Thank you for joining us today in our earnings call. Please 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 Tinal. Our first question is from Matheus Enfeldt from UBS.

My first question is about Moove. I would like to understand the results for this quarter, particularly regarding the insurance. What was the effect on the profit related to the EBITDA, and what is the status of the asset's insurance? I want to grasp the results better. Looking ahead, what kind of insurance recurrence can we expect on the profits that were not realized, and how will you negotiate with the insurance company? An update on that topic would be appreciated. My second question concerns the debt service coverage ratio and its progress. It seems like your net interest payment was relatively low this quarter, which might impact cash flow in the upcoming quarter and apply pressure on the debt service coverage ratio. Considering a net debt average of BRL 21 billion with an average interest rate of 13% to 14%, the net cash interest should be around BRL 2.9 billion, but it appears to be closer to BRL 2.3 billion. Can you provide more insight into the dynamics? Are we calculating this correctly, or has there indeed been a concentration of cash interest until the middle of the year?

Thanks, Matheus. Good morning, and thank you for the question. I'll begin with an update on Moove. It's critical to emphasize that the company is entirely focused on its recovery and ensuring that the regulatory process is conducted appropriately for all stakeholders in accordance with the insurance regulations. This quarter, we reported just over BRL 400 million, reflecting the advancements in the regulatory process. As you mentioned, the full impact will be evaluated over time, particularly in the coming quarters. We will maintain our stance on not providing guidance. However, production is gradually resuming each month, thanks to a new manufacturing system that incorporates both Rio de Janeiro and Sao Paulo into the manufacturing ecosystem. Capacity is no longer a concern for the company. It is also important to note that, in response to the fire incident, the company is adapting by enhancing fiscal efficiency and logistics to function with a different organizational structure than it originally had. This quarter has seen a significant increase in market share. Looking ahead, the plan includes a modernized plant in Rio, which will improve competitiveness and profitability, and we are already witnessing capital expenditures and the reconstruction of the Rio plant. This is significant and currently underway. In the future, the company will employ a different manufacturing structure, not solely based in Rio de Janeiro. That gives you a general overview of the situation. As I mentioned, the impact related to insurance will become apparent in the coming quarters. Regarding your second question on the debt service coverage ratio, there are a couple of points to clarify. Your perspective is accurate, but it's important to differentiate between items. Part of our debt, which we disclosed, functions as a bullet, meaning there's no payment of interim interest, and there are dynamics related to the bonds and debentures according to the coupon schedule. While some accruals exist, they did not translate to cash this quarter. This is standard practice, consistent with previous quarters. You are correct that we expect a decrease in the debt service coverage ratio moving forward, which is why we are focused on systematically reducing leverage throughout the company.

The next question is from Thiago Duarte from BTG Pactual.

I want to go back to Moove briefly to discuss the volume dynamics. Volumes were similar to the previous quarter, and the fire incident didn't impact the entire quarter. It seems that the volume recovery in the second quarter occurred quite quickly. You mentioned this in your earnings report, but I would like more details on the recovery to meet capacity and volumes. Additionally, if possible, could you provide insight into the pace at which these volumes came in at the end of the quarter to help us understand their future trends? My second question pertains to the priority of recycling your portfolio, divestitures, and reducing the group's debt. Can you give us an update? In previous earnings calls, both you, Rodrigo and Marcelo, discussed various options and strategies the company has after the Vale divestiture to further reduce your indebtedness. You frequently mention priorities, where some assets are being held until they mature while others are seen as crucial to your portfolio. You have several ways to generate cash, ensure resilience, and stability, and address more commodities. Now that we are halfway through August, I would like to know if any of these priorities have changed, especially considering the urgency due to the cost of debt and high interest rates. Does it still make sense to focus on the assets you identified as more monetizable?

I'll start with Moove. It's important to note that despite the fire in the first quarter, the company had sufficient inventory to manage the situation for a while. Regarding volume dynamics, our strategy has centered on protecting our distributor network and key clients to maintain our volumes. The customer base is crucial for the company's future competitiveness, even as we transition to a new manufacturing ecosystem that has some inefficiencies. Our focus remains on preserving the customer base to ensure a gradual ramp-up. As I mentioned when responding to Matheus, we observe a positive trend every month. Not only is the company recovering volumes, but we're also gaining insights into managing these inefficiencies and maintaining our customer base profitably. In fact, this quarter shows data indicating that the company is regaining a significant market share compared to the period right after the fire, reflecting substantial recovery. Moving on to your second question about priorities and options, it’s clear that our perspective hasn’t shifted. We are mindful of time and understand it might be a pressing issue. Our commitment remains to ensure that by the end of this journey, we have a high-quality portfolio that matches or surpasses the original. This is a critical factor for us. We will not compromise on the quality of the portfolio just to expedite our deleveraging efforts. Marcelo?

Adding to what Rodrigo said, deleveraging is a major priority for the company. It poses a challenge for us while maintaining a well-balanced portfolio. We do have assets that we are considering partially selling at the moment, and there are ongoing discussions about these sales. Some of these discussions have been happening for a while, while others are more recent. By the end of the year, we aim to have a clear understanding from the market regarding the businesses we will be monetizing to raise the necessary funds. Our deleveraging efforts will continue beyond this year. Our goal is to minimize debt at the holdco level at Cosan, as carrying this debt creates fiscal inefficiencies. This is not new information, as we've discussed it before. Maintaining a well-balanced portfolio is crucial as we evaluate options for Raizen, which is currently part of our strategy. I want to emphasize that it does not make sense for Cosan to invest more capital into Raizen right now, as it is focused on finding balance in its own capital structure. We acknowledge Raizen's portfolio challenges and are working on addressing those assets with Shell, aiming to move forward as soon as possible. I want to stress that there is urgency in finding alternatives, and we currently have more options than a few months ago. However, executing these transactions is not straightforward, especially considering the volatility Brazil is experiencing. Nonetheless, we are fully committed to resolving Cosan's capital structure and assessing the other companies in our portfolio.

The next question is from Monique Grego from Itau BBA.

Marcelo, you mentioned Raizen and the challenges you're addressing. We listened to Raizen's earnings call yesterday where they discussed the possibility of a strategic partnership. Could you explain the ideal conditions for bringing in a strategic partner and how that fits with your other options? Additionally, could you provide more details on when you expect to receive the insurance claims and what kind of cash influx we might anticipate from those claims? Lastly, with the new production arrangements at Moove, what do you see as the potential for generating results, especially since you're planning to rebuild the plant?

Monique, thank you for your question about Raizen. I'll start and then I'll turn it over to Marcelo. Before we discuss any partners, I want to highlight a few key points shared during the earnings release call yesterday. As a shareholder, I must say that the company is performing exceptionally well. In the second quarter, we outperformed our competitors in fuel distribution, achieving market share gains and reducing general and administrative expenses. The team and the company structure are being optimized. They are also engaged in an asset sale process that has exceeded our expectations. We are very pleased with the results we have seen. Regarding bringing in a partner, in light of Cosan's leverage ratio, we are prioritizing the attraction of a new strategic partner. Due to Cosan's capital structure constraints, this could be diluted in a potential capitalization. Now, I'll hand it over to Marcelo to elaborate on my points.

We are actively considering the option of bringing in a strategic partner. The initial capital contribution is crucial in finding someone whose goals align with ours and Shell's strategy, which is also vital for the business. This is a collaborative effort with Shell. While it is too early to determine the exact outcomes, we have made a company announcement confirming our joint initiative to move forward with this plan, acknowledging the company's need for capital and the potential to bring in a partner who shares our strategic focus, which remains a priority for both us and Shell. There are several options that could be beneficial, and we will keep you updated as we progress. We recognize the importance of timing for both Cosan and Raizen and are striving to expedite the process. As I reiterated yesterday, we are keen on bringing a strategic partner to Raizen. Regarding Moove, we will not provide guidance on the company's future. However, I want to emphasize that if the regulatory process goes smoothly and stakeholder engagement is successful, that will be essential. The company is committed to optimizing this new ecosystem and we are on track with our volumes. Our current focus is on enhancing our operations, ensuring we have secured customers and volume, and identifying areas for improvement month by month.

The next question is from Gabriel Barra, Citi.

My question is related to the same topic but approaches it from a slightly different angle. I recall your Investor Day a few years back when you discussed partnership and succession. Given the current state of the balance sheet, your intention to reduce debt, and the situation with Raizen, along with the need for capital and prioritization issues, what are your thoughts on capitalization at Cosan? Considering succession or long-term partnerships may not be immediate priorities, would it make sense to bring in a partner and increase capital at Raizen through a capitalization increase at Cosan, especially if the expected third player does not enter Raizen?

Gabriel, I'll start with your second question. It's important to clarify that bringing in a third party to Raizen is completely separate from any capital increases at Cosan. Addressing Raizen's capital structure is a priority for us, but that doesn’t imply that anything needs to change at Cosan. Regarding succession at Cosan, we recognize its significance and it ranks as a top priority alongside the capital structure issue, which we will address in due time. The management understands its importance, and we've had discussions about it. However, any decisions ultimately rest with Rubens and his family, and we've talked it over with him. Concerning our execution plan, we intend to partially monetize some assets but have no plans to sell any company in our portfolio outright. It’s crucial to clarify that we need a resource pool to help us rebalance our capital structure as a first step. Any increase in capital must be discussed with Rubens, and if it occurs, it will be at the right moment while also considering succession, which I agree is essential. But this will only take place after we've discussed and agreed with Rubens and tackled the primary capital structure issues at Cosan. We will begin with the assets, follow our planned sequence of events, explore options with Rubens regarding Raizen’s future, and address succession with him and his family. We might eventually reach the point you mentioned, but that is not something I can elaborate on at this time.

The next question is from Gustavo Sadka, Bradesco BBI.

I have a question because most of the topics have already been covered. Regarding dividends, it's clear that paying out dividends is a low priority for Raizen right now. However, Compass has shown impressive results with strong cash generation and manageable leverage. Would it be reasonable to consider that Compass could distribute dividends exceeding its 50% payout policy in the near term? Additionally, taking into account Moove's restructuring, which has been followed by good dividend payouts in the past, should we anticipate that, not this year but perhaps in 2026 or 2027, Moove could become a significant dividend contributor for the holding company?

We're not providing any guidance on dividends for the business. It's more about understanding the current situation. I'm not sharing any value guidance, but Compass is a stable and growing company that is resilient to market cycles and generates cash. Therefore, it is likely to pay out good dividends in the future, but I won't provide any specific guidance. It's too early to discuss Moove. Right now, we are more focused on ensuring that the company gets back on track from where we were. There has been significant progress, and we are pleased with the developments. However, it’s premature to talk about it. Looking ahead, the company has historically and will continue to generate cash. It is financially sound, just experiencing a rough phase. So, in the mid to long term, the company will generate substantial cash. The main focus now is on restoring the company to its full operational capacity and dealing with the insurance regulation process.

The next question is from Rohm Rodrigues from XP.

Some of my questions have already been answered. I have a follow-up question about Moove. Is the BRL 491 million recorded as a loss or profit a preliminary assessment? Have you made any progress on whether you might receive that amount? Is there any additional bureaucracy you need to navigate with the insurance company to confirm that it is the correct figure? And do you have an estimate of when you'll be able to monetize that asset?

In practice, we couldn't disclose the amount we accounted for or the specific insurance categories, as we have discussed in previous earnings releases. The company dealt with more than just the loss or profit; there is also the environmental aspect and the fact that we are already rebuilding the plant. As for future estimates, we will not be providing guidance on that. We expect to realize the size of the impact later and will account for additional items in the future. Regarding the timeline for monetization, the regulatory process is ongoing and involves many stakeholders. We don't have a timing estimate for monetization, but I can say that the regulatory process is on track, and everyone is pleased with the progress.

This concludes Cosan second quarter 2025 earnings release video conference. For further questions, please contact the Investor Relations department. Thank you so much for joining us, and have a great afternoon.